Possibility of investing in flexible manufacturing cell

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Reference no: EM131684233

A company that manufactures automobile parts is weighting the possibility of investing in an FMC (Flexible Manufacturing Cell). This is a separate investment and not a replacement of the existing facility. Management desires a good estimate of the distribution characteristics for the AW. There are three random variables; i.e., they have uncertainties in their values. An economic analyst is hired to estimate the desired parameter, AW. He concludes that the scenario presented to him is suitable for Monte Carlo simulation (method of statistical trials) because there are uncertainties in three variables and the direct analytical approach is virtually impossible. The company has done a preliminary economic study of the situation and provided the analyst with the following estimates: Investment Normally distributed with mean of $100,000 and standard deviation of $10,000 Useful Life Uniformly distributed with minimum of 5 years and maximum of 15 years Market value $20,000 (single outcome) Annual net cash flow $20,000 probability 0.3 $16,000 probability 0.5 $22,000 probability 0.2 Interest rate 10% All the elements subject to variation vary independently. 1) Use Monte Carlo simulation to generate 2000 AW outcomes for the proposed FMC. 2) Find the Average AW and Number of Positive AW. 3) Graph the results of analysis. 4) Interpret the results.

Reference no: EM131684233

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