Find out expected value and standard deviation for npw of

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Reference no: EM13393957

Dayton Metal Corporation (DMC), a medium-sized manufacturer of fabricated metal parts, is considering whether to enter the competition to become a supplier of transmission housings for Dayton Power & Light (DP&L). To compete, DMC must design a new fixture for the production process and purchase a new forge, which would cost $125,000. If DMC wins the competition, it may be able to sell as many as 2,000 units per year to DP&L for $50 each; variable production costs, such as direct labor and direct material costs, are estimated to be $15 per unit. Fixed costs are estimated to be $10,000 per year. DMC expects that the proposed project will have a life of about 5 years. The initial investment can be depreciated on a MACRS basis over a 7-year period, and the marginal income tax rate is 40%. At the end of 5 years, the forge is expected to have a market value equal to 32% of its original cost. Based on this information, the engineering and marketing departments at DMC have prepared the cash flow estimates shown in the table on the next page.

Tasks

DMC has decided to evaluate the project using the Monte Carlo technique with 1,000 iterations. All cash flow estimates in the table on the next page remain the same except for three variables.

a) Assume that the demand has the following discrete distribution: 20% probability of being 1600 units per year, 60% probability of being 2000 units per year, and 20% probability of being 2400 units per year.

b) Assume that the unit price has a triangular distribution in which the lowest price is $48, the most likely price is $50, and the highest price is $53.

c) Assume the salvage value is uniformly distributed between $30,000 and $50,000.

Determine the expected value and standard deviation for the NPW of the project. Include a histogram and a plot of the NPW cumulative average versus number of iterations (to show stabilization). Discuss the results and the impact on DMC's decision to pursue the project.

Provide your responses in a Word document to be submitted electronically through Isidore. Additionally, please submit the Excel file used to generate your responses.

After-Tax Cash Flow

	YR0	YR1	YR2	YR3	YR4	YR5
Revenues
Unit price		50	50	50	50	50
Demand (units)		2,000	2,000	2,000	2,000	2,000
Sales revenue		100,000	100,000	100,000	100,000	100,000
Expenses
Unit variable cost		15	15	15	15	15
Variable cost		30,000	30,000	30,000	30,000	30,000
Fixed cost		10,000	10,000	10,000	10,000	10,000
Depreciation		17,863	30,613	21,863	15,613	5,575
Taxable income		42,137	29,387	38,137	44,387	54,425
Income taxes (40%)		16,855	11,755	15,255	17,755	21,770
Net income		25,282	17,632	22,632	26,632	32,655
Cash Flow Statement
Operating activities
Net income		25,282	17,632	22,632	26,632	32,655
Depreciation		17,863	30,613	21,863	15,613	5,575
Investment activities
Investment	(125,000)
Salvage						40,000
Gains tax						(2,611)
Net cash flow	(125,000)	43,145	48,245	44,745	42,245	75,619

Reference no: EM13393957

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