Reference no: EM1311914

Estimating the profit value using Crystal Ball software.

1. For this problem, please use the following Run Preferences: 1000 Trials, Use Same Sequence of Random Numberswith an Initial Seed Value of 999, and the Latin Hypercube sampling method with a Sample Size of 500. Under Cell Preferences (Define menu), select the Set Cell Value to Distribution Mean option.  

Best Fry's Electronics:

John Obama has a passion for electronics, and in particular, high-end audio and video equipment. He has spent the last 10 years as an assistant manager for Circuit Village-an electronics retailer. He has decided he'd like to become his own boss. Barack McCain is the owner of Best Fry's Electronics. He wants to sell the store to John for $1 million to be paid in installments of $200,000 in each of the next five years. According to the current owner, the store usually brings in revenue of around $2.5 million each year, but it can be as low as $1.8 million or as high as $3.5 million. A statistical analysis of the cost of goods sold indicate that each year it averages 65% of that year's sales revenue, with a standard deviation of 3% of the sales revenue, where this cost rate tends to follow the normal distribution. In addition, there are fixed operating costs (sales force salaries, land lease costs, etc.) of $500,000 per year. Realizing that some uncertainty is involved in this decision, John wants to use simulation to estimate what level of net profit (accounting for revenue, cost of goods sold, installment payments, and operating costs) he can expect the store to earn during the next five years as he operates and pays for the store. Ignore the time value of money for this problem (i.e., use undiscounted net profit values).

Use Crystal Ball to determine answers to each of the following questions. Please use the run preferences and cell preferences mentioned above. Write a sentence or two to answer each question. The answers must be based on the results of a 1000-trial simulation and the Crystal Ball chart orgraph showing the numbers used in your answers must be pasted into your spreadsheet (use Copy Chart from the Edit menu of the forecast chart).

a. How much net profit can John expect (on average) to earn from the store in total over the next five years?

b. What is the probability that he will earn a net profit of at least $1 million in total over the next five years?

c. What is the overall probability that John will at least break even (net profit ≥ 0) in each and every one of the next five years? (I'm looking for a single overall probability that the he will at least break even every year, rather than individual probabilities for each year.)