1 Fertilizer Business 2 3 Discount rate Uniformly distributed between 7% and 13%. 4 5 Triangular...

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1 Fertilizer Business 2 3 Discount rate Uniformly distributed between 7% and 13%. 4 5 Triangular ($15K, $20K, $28K). TIME 6 7 Initial Outlay 0 1 2 3 4 5 ($75,000) 8 Annual Cash Flow $20,000 $20,000 $20,000 9 Salvage Value $3,000 10 Total Cash Flow ($75,000) $20,000 $20,000 $20,000 $0 $3,000 Uniform ($20K - $30K) in boom times (30% probability) 11 Uniform ($10K $20K) in recession (70% 12 NPV 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 13 We have a Fertilizer company who wants to calculate its NPV for the next 5 years. However, there are some uncertainties needed to be incorporated into the calculation: Cost of capital ~ uniformly distributed between 7% and 13% Cash flows at time 4 - 5 are uncertain: CF4 ~ triangular distribution ($15K, $20K, $28K) CF5 ~ uniformly distributed between $20K and $30K 1. What is the probability that NPV is between $5K and $7K? What variable is NPV most sensitive to? 2. If the cash flow at time 4 follows a triangular distribution ($15K, $20K, $28K) in boom times with 30% probability and uniformly distributed between $10K and $20K in recession with 70% probability. Can you run the simulation and calculate what is the probability that NPV is between $5K and $7K? What variable is NPV most sensitive to? 1 Fertilizer Business 2 3 Discount rate Uniformly distributed between 7% and 13%. 4 5 Triangular ($15K, $20K, $28K). TIME 6 7 Initial Outlay 0 1 2 3 4 5 ($75,000) 8 Annual Cash Flow $20,000 $20,000 $20,000 9 Salvage Value $3,000 10 Total Cash Flow ($75,000) $20,000 $20,000 $20,000 $0 $3,000 Uniform ($20K - $30K) in boom times (30% probability) 11 Uniform ($10K $20K) in recession (70% 12 NPV 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 13 We have a Fertilizer company who wants to calculate its NPV for the next 5 years. However, there are some uncertainties needed to be incorporated into the calculation: Cost of capital ~ uniformly distributed between 7% and 13% Cash flows at time 4 - 5 are uncertain: CF4 ~ triangular distribution ($15K, $20K, $28K) CF5 ~ uniformly distributed between $20K and $30K 1. What is the probability that NPV is between $5K and $7K? What variable is NPV most sensitive to? 2. If the cash flow at time 4 follows a triangular distribution ($15K, $20K, $28K) in boom times with 30% probability and uniformly distributed between $10K and $20K in recession with 70% probability. Can you run the simulation and calculate what is the probability that NPV is between $5K and $7K? What variable is NPV most sensitive to?