You are now asked to analyse the variations on the impact of market share, cost of producing, overheads and initial investment on the NPV. You need to conduct a risk analysis based on the information below:
a) Market share: could be as low as 5% or as high as 15%, but is most likely to be 10%. The distribution could be represented using a triangular distribution.
b) Unit costs can be described by normal distribution – mean of $30.00 and standard deviation of $12.00.
c) Overhead: could be as low as $150,000 per year or as high as $350,000 per year, but is most likely to be $215,000 per year. The distribution could be represented using a triangular distribution.
d) Initial investment requirements can be uniformly distributed between $1,000,000 and $2,000,000.
The senior management decided on the following decision criteria:
Decision criteria: The company is unwilling to proceed if there is a 20% or greater chance that the net present value will be less than $1,000,000 (1 million).
- You are required to use Visual DSS to run a Monte Carlo simulation (a Risk Analysis).
- Produce a cumulative probabilities report and graph for the above question. Based on results and the decision criteria, explain whether the senior management should accept or reject the proposed production of the product.
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