Question

China's Galanz built a new complex at the expected cost of 2 billion yuan in order to produce 12 million air-conditioning units annually. The site was completed in 2004.
1 Make the following assumptions:

•The actual investment cost is either 1.9, 2.0, or 2.1 billion yuan, with respective probabilities of 0.25,0.50, and 0.25.
•The plant operates for 15 years, with the salvage value being either 50 million, 0, or-100 million(remediation costs) yuan at that time, with probabilities of 0.20,0.50, and 0.30, respectively.
•Finally, the net cash flow resulting from operations and sales is 60 yuan per unit. The number of units sold in each year is either 9 (0.1), 10 (0.2), 11 (0.3), or 12 (0.4) million. The figures in
parentheses represent the probabilities of the given level of production.

Assume that these are the only relevant cash flows and the interest rate is 18% per year.

a) Find an expression for the present worth (PW).

b) Find the expected value of the PW(if possible).

c) Find the standard deviation of the PW(if possible).

d)Find Pr(PW >0) (if possible).

e)Perform 200 simulations, and find the sample mean, standard deviation, as well as the probability that the investment will have a positive PW (point & interval estimates). Finally, summarize your process (which will naturally include all the appropriate steps) and results

Answer 1

Answers of question number a,b and d.  

Time of project	15 years
Cost of Capital	0.18
			Cash Outflow (in Billion)	Probability	Cash Inflow by sales (in billion)	Probability	Salvage Value (in Billion)	Probability
			1.9	0.25	0.54	0.1	0.05	0.2
			2	0.5	0.6	0.2	0	0.5
			2.1	0.25	0.66	0.3	-0.1	0.3
					0.72	0.4
Cash Flows			2		0.66		-0.02
Cash Flows at present value term			2		3.36072		-0.00167
		PW (in Billion )	11.88
		PW (in Million )	11880
		Pr(PW )(in Billion)	1.35905
		Pr(PW)( In Million)	1359.05

answer of question no c) .Standard Deviation for PW cann't be calculated from the given data as cash outflow and cash inflow along with salvage value have probability of occurances.

Answer of e) As the all data is question are fixed as suitbale for calculation of Pr(PW).

so , Mean value is same as above .

Steps : See the calulated table all formuals are incorporated there.