Calculating NPV with Uncertain Future Returns using Simulation Technique. Please submit Excel document for problem 2 and 3.

Lets review what we did in the Kensingten firm example from HW08-00. When, t time of the event (e.g., t = 1 means the end of first time period); x cash netflow; r The hurdle rate;

Then, for this problem, the NPV is calculated using the following formula: NPV=x_01/(1+r)^0 +x_11/(1+r)^1 +x_21/(1+r)^2 +x_31/(1+r)^3 +x_41/(1+r)^4 +x_51/(1+r)^5 Or simply, NPV=_(t=0)^5x_t 1/(1+r)^t

In equation 1, which variables (t,x,r,NPV) are uncertain? Is NPV uncertain? If it is uncertain, why?

Please answer the following two questions based on the Kensingten firm example from the HW08-00. Please follow the steps from the lecture video to complete the following questions. If the initial investment is -27,000, what is the probability P(NPV0)? In order to let P(NPV0) = 95%, what should the initial investment be?

Lets assume that this project incurs additional 1,000 cash outflow at the end of each year for general and administrative expense. All other parameters are not changing. (If you changed the initial investment into something else to solve the problem 2, please change it back to -20,000). How does this change the P(NPV0)? (Hint: You need to deduct 1,000 from each years cash netflow before they are being discounted back to the present value)