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A plant manager is considering investing in a new $35,000 machine. Use of the new machine...

A plant manager is considering investing in a new $35,000 machine. Use of the new machine is expected to generate a cash flow of about $8,000 per year for each of the next 5 years. However, the cash flow is uncertain, and the manager estimates that the actual cash flow will be normally distributed with a mean of $8,000 and a standard deviation of $500. The discount rate is set at 8% and assumed to remain constant over the next 5 years. The company evaluates capital investments using net present value. How risky is this investment? Develop an appropriate simulation model (with 300 trails) and conduct experiments and statistical output analysis to answer this question in excel.

Math   Statistics-And-Probability   
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Answer #1

Solution,

Formulation

The descriptive statistic for NPV

Mean -3036.597075
Standard Error 48.91762322
Median -3038.570467
Mode #N/A
Standard Deviation 847.2780881
Sample Variance 717880.1585
Kurtosis 0.170742719
Skewness -0.075890956
Range 5520.608025
Minimum -5801.922129
Maximum -281.314104
Sum -910979.1224
Count 300
Confidence Level(95.0%) 96.26644208
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