Orange Tech (OT) is a software company providing a suite of programs that are essential to everyday business computing. OT has just enhanced its software and released a new version of its programs. For financial planning purposes, OT needs to forecast its revenue over the next few years. To begin this analysis, OT is considering one of its largest customers. This customer always eventually upgrades to the newest software version, but the number of years that pass before the customer purchases an upgrade varies. Up to the year that the customer actually upgrades, assume there is a 0.50 probability that the customer upgrades in any particular year. In other words, the upgrade year of the customer is a random variable. For guidance on an appropriate way to model upgrade year, refer to Appendix 11.1. Furthermore, the revenue that OT earns from the customer’s upgrade also varies (depending on the number of programs the customer decides to upgrade). Assume that the revenue from an upgrade obeys a normal distribution with a mean of $100,000 and a standard deviation of $25,000. Using the template in the file orangetech, complete a simulation model that analyzes the net present value of the revenue from the customer upgrade. Use an annual discount rate of 10 percent.
a. What is the average net present value that OT earns from this customer?
b. What is the standard deviation of net present value? How does this compare to the standard deviation of the revenue? Explain.