Compute the average and minimum npv and irr

Reference no: EM132753547

Question: A firm is in the process of assessing the profitability of venturing into a business selling new tech product. Because of the fast changing technology, the life of the product is expected to last only for 10 years. Since there is a significant risk in their projected volumes and cost, they would like to simulate the investment decision, with the following details:

- The initial development cost for the product is expected to be normally distributed with a mean of $1,500,000 and a standard deviation of $250,000.

- Quantity sold varies each year and is expected to be uniformly distributed from a minimum of 10,000 to a maximum of 15,000 per year.

- They plan to sell the tech product at $99 per unit in the first year and will change the price from the second year onwards depending on the sales performance. The price may varies each year from second year onwards, the price difference is in the range of -10% to 8% from the $99, with all values equally likely,

- Variable cost for the product is also varies each year as it depends on the labour and material costs during production. The variable cost per unit is somewhere between $45.50 to $50.50, with all values equally likely.

- Annual fixed cost is predicted to be $250,000 in the first five years and $300,000 in the last five years.

- At the end of 10th year, they would like to sell this business; there is a 20% chance it can be sold at $50,000; 40% chance at $60,000; 25% chance at $70,000; and a 15% chance be sold at $80,000.

- Their cost of capital (MARR) is 10%.

Net Present Value (NPV) and Internal Rate of Return (IRR) model for the investment. Replicate 500 trials Monte Carlo simulation. [22 marks]
Based on the 500 trial Monte Carlo simulation.

- Compute the average, maximum and minimum NPV and IRR?

- The firm will proceed if the likelihood of the business having a positive NPVs exceeds 70% of the time. Based on your simulation result, should they proceed with this business venture?

Reference no: EM132753547

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