Dord Motors is considering whether to introduce a newmodel: the Racer. The profitability of the Racer will dependon the following factors:■ Fixed cost of developing Racer: Equally likely to be$3 billion or $5 billion.■ Sales: Year 1 sales will be normally distributed withm 200,000 and s 50,000.Year 2 sales will be normally distributed with m year 1 sales and s 50,000.Year 3 sales will be normally distributed with m year 2 sales and s 50,000.For example, if year 1 sales 180,000, then the meanfor year 2 sales will be 180,000.■ Price: Year 1 price $13,000Year 2 price 1.05*{(year 1 price) $30*(% bywhich year 1 sales exceed expected year 1 sales)}The 1.05 is the result of inflation!Year 3 price 1.05*{(year 2 price) $30*(% bywhich year 2 sales exceed expected year 2 sales)}For example, if year 1 sales 180,000, thenyear 2 price 1.05*{13,000 30(10)} $13,335■ Variable cost per car: During year 1, the variable costper car is equally likely to be $5,000, $6,000, $7,000,or $8,000.Variable cost for year 2 1.05*(year 1 variable cost)Variable cost for year 3 1.05*(year 2 variable cost)Your goal is to estimate the NPV of the new car dur-ing its first three years. Assume that cash flows arediscounted at 10%; that is, $1 received now is equiv-alent to $1.10 received a year from now.a Simulate 400 iterations and estimate the mean andstandard deviation of the NPV the first three years ofsales.b I am 95% sure that the expected NPV of this projectis between _____ and _____.c Use the Target option to determine a 95% confi-dence interval for the actual NPV of the Racer duringits first three years of production.d Use a tornado graph to analyze which factors aremost influential in determining the NPV of the Racer.
Dord Motors is considering whether to introduce a newmodel: the Racer. The profitability of the Racer will dependon the following factors:■ Fixed cost of developing Racer: Equally likely to be$3 billion or $5 billion.■ Sales: Year 1 sales will be normally distributed withm 200,000 and s 50,000.Year 2 sales will be normally distributed with m year 1 sales and s 50,000.Year 3 sales will be normally distributed with m year 2 sales and s 50,000.For example, if year 1 sales 180,000, then the meanfor year 2 sales will be 180,000.■ Price: Year 1 price $13,000Year 2 price 1.05*{(year 1 price) $30*(% bywhich year 1 sales exceed expected year 1 sales)}The 1.05 is the result of inflation!Year 3 price 1.05*{(year 2 price) $30*(% bywhich year 2 sales exceed expected year 2 sales)}For example, if year 1 sales 180,000, thenyear 2 price 1.05*{13,000 30(10)} $13,335■ Variable cost per car: During year 1, the variable costper car is equally likely to be $5,000, $6,000, $7,000,or $8,000.Variable cost for year 2 1.05*(year 1 variable cost)Variable cost for year 3 1.05*(year 2 variable cost)Your goal is to estimate the NPV of the new car dur-ing its first three years. Assume that cash flows arediscounted at 10%; that is, $1 received now is equiv-alent to $1.10 received a year from now.a Simulate 400 iterations and estimate the mean andstandard deviation of the NPV the first three years ofsales.b I am 95% sure that the expected NPV of this projectis between _____ and _____.c Use the Target option to determine a 95% confi-dence interval for the actual NPV of the Racer duringits first three years of production.d Use a tornado graph to analyze which factors aremost influential in determining the NPV of the Racer.
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