Jennifer, a senior project manager, estimated net cash flow after taxes (CFAT) for a large project she is working on. The additional CFAT of $2,800,000 in year 10 is the salvage value, estimated at 9% of the $31 million first cost for all capital assets.
The PW value at the current MARR of 7% per year is
PW = ?31,000 + 5400(P?A,7%,6) + 2040(P?A,7%,4)(P?F,7%,6) + 2800(P?F,7%,10) = $767
Jennifer believes the MARR will vary over a relatively narrow range, as will the CFAT, especially during the out years of 7 through 10. She is willing to accept the other estimates as certain. Use the following probability distribution assumptions for MARR and CFAT to perform a simulation—hand- or spreadsheet-based.
MARR. Uniform distribution over the range 6% to 10%.
CFAT, years 7 through 10. Uniform distribution over the range $1,600,000 to $2,400,000 for each year.
Plot the resulting PW distribution. Should the plan be accepted using decision making under certainty? Under risk?
Using a spreadsheet, the steps in Sec. 19.5 are applied.
1. CFAT given for years 0 through 6.
2. i varies between 6% and 10%.
CFAT for years 7-10 varies between $1,600,000 and $2,400,000, written in $1000.
3. Uniform for both i and CFAT values.
4. Set up a spreadsheet. The example below has the following relations:
Col A: = RAND ( )* 100 to generate random numbers from 0-100.
Col B, cell B13: = INT((.04*A13+6) *100)/10000 converts the RN to i between
0.06 and 0.10. The % designation changes it to an interest rate between
6% and 10%.
Col C: = RAND( )* 100 to generate random numbers from 0-100.
Col D, cell D13: = INT (8*C13+1600) converts RN to a CFAT between $1600
and $2400.
Ten samples of i and CFAT for years 7-10 are below in columns B and D,
respectively (highlighted).
5. Columns F, G and H give 3 CFAT sequences, for example only, using rows 4, 5 and 6 RN generations. The entry for cells F11 through F13 is = D4 and cell F14 is
= D4+2800, where S = $2800. The PW values are obtained using the NPV function.
6. Plot the PW values for as large a sample as desired. Or, following the logic of
Figure 19-14, a spreadsheet relation can count the + and – PW values, with average and standard deviation calculated for the sample.
7. Conclusion:
For certainty, accept the plan since PW = $767 exceeds zero at 7% per year.
For risk, the result depends on the preponderance of positive PW values from the
simulation, and the distribution of PW obtained in step 6.
You might also like to view...
A ____ plan is used to show below-grade concrete work.
A. foundation B. frame C. roof D. floor
¿Qué tipo de plano se debe utilizar para ubicar un componente que presenta fallas?
a. Diagrama unifilar b. Diagrama elemental c. Diagrama de bloques d. Diagrama de conexiones
Technician A says that a breakout box is sometimes required to diagnose an older antilock braking system. Technician B says that a breakout box requires the use of a digital multimeter. Which technician is correct?
A) Technician A only B) Technician B only C) Both technicians D) Neither technician
Give the two key factors that are critical to the retention of grain quality for a long period of time
What will be an ideal response?