Marissa Jones is the president and CEO of Sound's Alive, a company that manufactures and sells a line of speakers, CD players, receivers, high-definition televisions, and other items geared for the home entertainment market. Respected throughout the industry for bringing many high-quality, innovative products to market, Marissa is considering adding a speaker system to her product line.

The speaker market has changed dramatically during the past several years. Originally, high-fidelity aficionados knew that to reproduce sound covering the fullest range of frequencies-from the lowest kettle drum to the highest violin-a speaker system had to be large and heavy. The speaker had various drivers: a woofer to reproduce the low notes, a tweeter for the high notes, and a mid-range driver for the broad spectrum of frequencies in between. Many speaker systems had a minimum of three drivers, but some had even more. The trouble was that such a system was too large for anything but the biggest rooms, and consumers were reluctant to spend thousands of dollars and give up valuable wall space to get the excellent sound these speakers could reproduce.

The trend has changed during the past several years. Consumers still want good sound, but they want it from smaller boxes. Therefore, the satellite system became popular. Consisting of two small boxes that house either one driver (to cover the mid-range and high frequencies) or two (a mid-range and tweeter), a satellite system can easily be mounted on walls or shelves. To reproduce the low notes, a separate subwoofer that is approximately the size of a cube 18 inches on a side is also needed. This subwoofer can be placed anywhere in the room. Taking up less space than a typical large speaker system and sounding almost as good, yet costing hundreds of dollars less, these satellite systems are hot items in the high-fidelity market.

Recently, the separate wings of home entertainment-high fidelity (receivers, speakers, CD players, DVD players, and so on), television (large screen monitors, digital video recorders, laser players), and computers (games with sounds, virtual reality software, and so on)-have merged into the home theater concept. To simulate the movie environment, a home theater system requires the traditional stereo speaker system plus additional speakers placed in the rear of the room so that viewers are literally surrounded with sound. Although the rear speakers do not have to match the high quality of the front speakers and, therefore, can be less expensive, most consumers choose a system in which the front and rear speakers are of equal quality, reproducing the full range of frequencies with equal fidelity.

It is this speaker market that Marissa wants to enter. She is considering having Sound's Alive manufacture and sell a home theater system that consists of seven speakers. Three small speakers-each with one dome tweeter that could reproduce the frequency range of 200 Hertz to 20,000 Hertz (upper-low frequencies to the highest frequencies)-would be placed in front, and three similar speakers would be placed strategically around the sides and back of the room. To reproduce the lowest frequencies (from 35 Hertz to 200 Hertz), a single subwoofer would also be part of the system. This subwoofer is revolutionary because it is smaller than the ordinary subwoofer, only 10 inches per side, and it has a built-in amplifier to power it. Consumers and critics are thrilled with the music from early prototype systems, claiming that these speakers have the best balance of sound and size. Marissa is extremely encouraged by these early reviews, and although her company has never produced a product with its house label on it (having always sold systems from established high-fidelity companies), she believes that Sound's Alive should enter the home theater market with this product.

a. Use simulation to analyze the Sound's Alive problem. Based on your results, what is the expected net profit for the years 2015 through 2018, and what is the expected NPV for this business venture?

b. The Board of Trustees told Marissa that the stockholders would feel comfortable with this business venture if its NPV is at least $5 million. What are the chances that Sound's Alive home theater venture will result in an NPV of $5 million or more?