What is the net present value of an investment thatcosts $75,000 and has a salvage value of $45,000? The annualprofit from the investment is $15,000 each year for 5 years. Thecost of capital at this risk level is 12%.

What is the net present value of an investment thatcosts $75,000 and has a salvage value of $45,000? The annualprofit from the investment is $15,000 each year for 5 years. Thecost of capital at this risk level is 12%.

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Description: What is the net present value of an investment thatcosts $75,000 and has a salvage value of $45,000? The annualprofit from the investment is $15,000 each year for 5 years. Thecost of capital at this risk level is 12%.

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter11: Simulation Models

Section: Chapter Questions

Problem 45P: You now have 10,000, all of which is invested in a sports team. Each year there is a 60% chance that...

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It costs a pharmaceutical company 75,000 to produce a 1000-pound batch of a drug. The average yield from a batch is unknown but the best case is 90% yield (that is, 900 pounds of good drug will be produced), the most likely case is 85% yield, and the worst case is 70% yield. The annual demand for the drug is unknown, with the best case being 20,000 pounds, the most likely case 17,500 pounds, and the worst case 10,000 pounds. The drug sells for 125 per pound and leftover amounts of the drug can be sold for 30 per pound. To maximize annual expected profit, how many batches of the drug should the company produce? You can assume that it will produce the batches only once, before demand for the drug is known.
Assume the demand for a companys drug Wozac during the current year is 50,000, and assume demand will grow at 5% a year. If the company builds a plant that can produce x units of Wozac per year, it will cost 16x. Each unit of Wozac is sold for 3. Each unit of Wozac produced incurs a variable production cost of 0.20. It costs 0.40 per year to operate a unit of capacity. Determine how large a Wozac plant the company should build to maximize its expected profit over the next 10 years.
A common decision is whether a company should buy equipment and produce a product in house or outsource production to another company. If sales volume is high enough, then by producing in house, the savings on unit costs will cover the fixed cost of the equipment. Suppose a company must make such a decision for a four-year time horizon, given the following data. Use simulation to estimate the probability that producing in house is better than outsourcing. If the company outsources production, it will have to purchase the product from the manufacturer for 25 per unit. This unit cost will remain constant for the next four years. The company will sell the product for 42 per unit. This price will remain constant for the next four years. If the company produces the product in house, it must buy a 500,000 machine that is depreciated on a straight-line basis over four years, and its cost of production will be 9 per unit. This unit cost will remain constant for the next four years. The demand in year 1 has a worst case of 10,000 units, a most likely case of 14,000 units, and a best case of 16,000 units. The average annual growth in demand for years 2-4 has a worst case of 7%, a most likely case of 15%, and a best case of 20%. Whatever this annual growth is, it will be the same in each of the years. The tax rate is 35%. Cash flows are discounted at 8% per year.
W. L. Brown, a direct marketer of womens clothing, must determine how many telephone operators to schedule during each part of the day. W. L. Brown estimates that the number of phone calls received each hour of a typical eight-hour shift can be described by the probability distribution in the file P10_33.xlsx. Each operator can handle 15 calls per hour and costs the company 20 per hour. Each phone call that is not handled is assumed to cost the company 6 in lost profit. Considering the options of employing 6, 8, 10, 12, 14, or 16 operators, use simulation to determine the number of operators that minimizes the expected hourly cost (labor costs plus lost profits).
Based on Kelly (1956). You currently have 100. Each week you can invest any amount of money you currently have in a risky investment. With probability 0.4, the amount you invest is tripled (e.g., if you invest 100, you increase your asset position by 300), and, with probability 0.6, the amount you invest is lost. Consider the following investment strategies: Each week, invest 10% of your money. Each week, invest 30% of your money. Each week, invest 50% of your money. Use @RISK to simulate 100 weeks of each strategy 1000 times. Which strategy appears to be best in terms of the maximum growth rate? (In general, if you can multiply your investment by M with probability p and lose your investment with probability q = 1 p, you should invest a fraction [p(M 1) q]/(M 1) of your money each week. This strategy maximizes the expected growth rate of your fortune and is known as the Kelly criterion.) (Hint: If an initial wealth of I dollars grows to F dollars in 100 weeks, the weekly growth rate, labeled r, satisfies F = (I + r)100, so that r = (F/I)1/100 1.)
Software development is an inherently risky and uncertain process. For example, there are many examples of software that couldnt be finished by the scheduled release datebugs still remained and features werent ready. (Many people believe this was the case with Office 2007.) How might you simulate the development of a software product? What random inputs would be required? Which outputs would be of interest? Which measures of the probability distributions of these outputs would be most important?
Six months before its annual convention, the American Medical Association must determine how many rooms to reserve. At this time, the AMA can reserve rooms at a cost of 150 per room. The AMA believes the number of doctors attending the convention will be normally distributed with a mean of 5000 and a standard deviation of 1000. If the number of people attending the convention exceeds the number of rooms reserved, extra rooms must be reserved at a cost of 250 per room. a. Use simulation with @RISK to determine the number of rooms that should be reserved to minimize the expected cost to the AMA. Try possible values from 4100 to 4900 in increments of 100. b. Redo part a for the case where the number attending has a triangular distribution with minimum value 2000, maximum value 7000, and most likely value 5000. Does this change the substantive results from part a?
Consider the following information for the Alachua Retirement Fund, with a total investment of $4 million. [5] Stock Investment Beta A $ 400,000 1.2 B 600,000 -0.4 C 1,000,000 1.5 D 2,000,000 0.8 The market required rate of return is 12 percent, and the risk-free rate is 6 percent. What is its required rate of return? Stock A has the following probability distribution of expected returns: [5] Probability Rate of Return 0.1 -15% 0.2 0 0.4 5 0.2 10 25 What is Stock A’s coefficient of variation? What is Stock T’s coefficient of…
Hemmingway, Inc., is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Hemmingway's president is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $25 million. Under this option, the company would not build the $20 million production facility. The decision tree is shown in Figure 4.16. The profit projection for each outcome is shown at the end of the branches. For example, the revenue projection for the high demand outcome is $59 million.…
Suppose that you want to invest $10,000 in the stock market by buying shares in one of two companies: A and B. Shares in company A though risky, could yield a 50% return on investment during the next year. If the stock market if conditions are not favorable (bear market) the stock may lose 20% of it value. Company B provides safe investments with 15% return in a bull market and only 5% in a bear market Ali the applications you have consulted are predicting a 60% chance for a bull market and 40% for a bear market. Where you invest your money? Construct a decision tree.
Your firm is considering purchasing an oldoffice building with an estimated remaining servicelife of 25 years. Recently, the tenants signed a longterm lease, which leads you to believe that the currentrental income of $250,000 per year will remain constant for the first five years. Then the rental incomewill increase by 10% for every five-year interval overthe remaining life of the asset. That is, the annualrental income would be $275,000 for years 6 through10, $302,500 for years 11 through 15, $332,750 foryears 16 through 20, and $366,025 for years 21through 25. You estimate that operating expenses,including income taxes, will be $85,000 for the firstyear and that they will increase by $5,000 each yearthereafter. You also estimate that razing the buildingand selling the lot on which it stands will realize a netamount of $50,000 at the end of the 25-year period.If you had the opportunity to invest your money elsewhere and thereby earn interest at the rate of 12% perannum, what would be…
A manager wants to expand summer resort facilities now or wait at least another year. If he expands now and the upcoming summer season is good, the profit will be K246 000; and if not good, the loss will be K60 000. If he delays the expansion for at least a year and the upcoming summer season is good, the profit will be K120 000; if the season is poor, the profit will be K12 000. Required: Assuming the probability of a good summer in both cases is 1/3, use Bayesian analysis to aid the manager.