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208 Applying simulation to decision problems
new management team which intends to extend the company’s
range of tableware designs. Trentware’s immediate objective is to
launch a new high-quality product for the Christmas market in
18 months’ time. Over 30 possible designs have been subjected to
both technical analysis (to assess their production implications) and
extensive market research. As a result of this analysis, the number
of potential designs has now been winnowed down to six. Some of
these designs are thought to offer more risk than others because of
changes in fashion, similarities to competing products and possible
production problems. Now one design has to be selected from the
six remaining. Risk analysis has been applied to each of these six
designs and some of the main results are given below:
Design 1 2 3 4 5 6
Mean NPV (£0000) 50 21 20 46 −49 60
Standard deviation
of NPV (£0000)
3 2 29 8 31 30
(a) You have been asked to explain to a colleague, who is unfamiliar
with risk analysis, how these results are likely to have been
derived. Draft some notes for your colleague and include in your
notes an evaluation of the usefulness of the technique.
(b) Compare the risk analysis results for the six designs and discuss
how a decision could be made between them.
(4) (This exercise is really designed to be carried out by a group of people,
with each individual using a different set of random numbers. The
individual results can then be combined by using the table at the end
of the question.)
An equipment hire company has to decide whether to buy a
specialized piece of earth-digging machinery for $6000. The machine
would be sold after two years. The main factors which it is thought
will affect the return on the investment are:
(i) The revenue generated by hiring the machine out for a day: it is
certain that this will be $40;
(ii) The number of days that the machine will be hired out in year 1
and in year 2;
(iii) The costs of having the machine available for hire (e.g. maintenance
and repair costs) in year 1 and year 2;
(iv) The price which will be obtained for the machine when it is sold
at the end of year 2.