2. A company that manufactures auto parts is weighing the possibility of investing in an FMC...

2. A company that manufactures auto parts is weighing the possibility of investing in an FMC (Flexible Manufacturing Cell). This is a separate investment and not a replacement of any existing facilities. Management desires a good estimate of the distribution characteristics of the AW. There are 3 random variables. An economic analyst is hired to estimate the desired parameter, AW. She concludes that the scenario presented to her is suitable for Monte Carlo simulation because of the uncertainties and a direct approach is virtually impossible. The company has done a preliminary economic study and provided the analyst with the following estimates:

• Investment – Normally distributed with mean of $200,000 and SD of $10,000

• Life – Uniformly distributed with minimum of 5 years and maximum of 15 years

• Market Value at End of Life – $20,000 (single outcome, no uncertainty)

• Annual Net Cash Flow – $32,000 (0.5 probability) $40,000 (0.3 probability) $44,000 (0.2 probability)

• MARR – 10% All the elements subject to variation vary independently.

Use Monte Carlo simulation to compute E(AW). Start with 200 trials and increase in increments of 200 until you feel confident that a stable (steady state) value is reached. What is that value?PLEASE SHOW IN EXCEL WITH FORMULAS

Expert Solution

Rahul Sunny answered 2 years ago

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