Considering to invest mobile phone app development project

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Reference no: EM132059191

You are considering to invest a mobile phone App development project. The development and testing phase of the new app will take two to ten months. This number of months can be modelled by the uniform distribution (hint: RiskIntUniform(2,10) in @Risk). After the app passes the test, the Initial Unit of Sales will follow the Triangular distribution RiskTriang(2000,5000,7000). The monthly sales growth rate is assumed to be normally distributed =RiskNormal(0.12,0.04). The app selling price is fixed at $3.99.

Let me give you an example for illustration. Say, it takes 4 months to develop the app. The initial unit of sales is 3000 and growth rate is 5%. The sales revenue in the first 4 months are all zeros (development phase has no revenue). The revenue starts from the 5th month with the value of 3000 units x $3.99. Next, the revenue in the 6th month will be of 3000 x (1+5%) units x $3.99. Accordingly, you can compute the revenue in 7th, 8th and …. Nth month. Bear in mind number of months, initial unit of sales and growth rate are all random however you can model these random variables easily using @Risk.

The initial investment is $100,000 and an appropriate discount rate is 12%. The project will end at month 18. That is, after you collect the last sales revenue in month 18, this product will be abandoned.

1. What is the expected NPV of this project?

2. What is the probability of losing money i.e. probability of a negative NPV.

3. What is the most significant risk factor in this project? Why?

Reference no: EM132059191

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