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Exercises 209
For each factor the following probability distributions have been
estimated:
No. of days hired
out in year 1
Prob.
(%)
No. of days hired out
in year 2
under 100 30 (This is assumed to
100 to under 200 50 have the same
200 to under 300 20 distribution as year 1)
Annual costs
($)
Prob. in year 1
(%)
Prob. in year 2
(%)
1000 to under 2000 50 30
2000 to under 3000 30 40
3000 to under 4000 20 30
Selling price
($)
Prob.
(%)
1000 to under 2000 40
2000 to under 3000 60
Carry out one simulation of a possible combination of circumstances
and calculate the NPV for your simulation. Use a discount rate
of 10%.
The results for the entire group can then be entered into the
following table:
Net present value
($)
No. of simulations resulting
in NPVs in this range Probability
−15 000 to under 0 .................. .......
0 to under 5 000 .................. .......
5 000 to under 10 000 .................. .......
10 000 to under 15 000 .................. .......
Therefore the most likely range for the NPV appears to be .......
and the probability of a negative NPV appears to be ...........
(5) The managers of a chemical company have to decide whether to
extend their existing plant or replace it with completely new equipment.
A simulation of the two alternatives gives the following
probability distributions of net present value: