Question: General Auto Corporation ( GAC ) is developing a new model of compact car. The car is assumed to generate sales for the next 5
General Auto Corporation GAC is developing a new model of compact car. The car is assumed to generate sales for the next years. GAC has gathered information about the following quantities through focus groups with marketing and engineering departments:
The fixed cost of manufacturing the cars is $ billion. The fixed cost is incurred at the beginning of year before any sales are recorded.
Margin per car: This is the unit selling price minus the variable cost of producing a car. GAC assumes that in year the margin will be $ Every other year the margin will decrease by
The demand for the car is uncertain. GAC assumes that the demand for the cars is normally distributed with mean and standard deviation Every year after that sales decreases by of the sales made in the previous year.
The discount rate is
Using a simulation model help GAC evaluate the NPV of the cash flows for this new car over the year horizon.
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