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Applying simulation to investment decisions 201
(i) The price of the machine;
(ii) The revenue resulting from the machine’s output in years 1 to 4;
(iii) Maintenance costs in years 1 to 4;
(iv) The scrap value of the machine at the end of year 4.
The price of the machine was known to be $30 000, but because there
was uncertainty about the other factors, probability distributions were
elicited from the company’s management. The shapes of these distributions
are shown in Figure 7.10 (for simplicity, it was assumed that the
distributions were independent).
Year 1
Year 2
6000 14000 25000
Revenue ($)
5000 15000
Revenue ($)
Year 3
5000 15000
Revenue ($)
Year 4
2000 12000
Revenue ($)
28000
30000
1000 2000 2500
Maintenance costs ($)
1000 4000 8000
Maintenance costs ($)
30000 3000 6000 10000
Maintenance costs ($)
4000 7000 12000 1000 2000 3000
Maintenance costs ($) Scrap value ($)
Figure 7.10 – Probability distributions for the Alpha machine (vertical axes represent
probability density)