Mary Wilson is the owner/manager of Protrack, a small business specializing in construction equipment. Mary has $150,000 of idle cash she wants to invest. The two options she is considering are:

(1) investing in a possible addition of a new product (CONST-11) to Protrack’s heavy equipment line,

(2) Loaning the $150,000 to a business associate for four years. The following is the relevant data for the two options. Option 1: Invest in CONST-11 Startup costs: $150,000 (include purchase of some new equipment, training of personnel and so on) Selling Price of CONST-11: $31,250 Fixed costs/year: $15,000 Depreciation/year: $10,000 (Any new equipment purchased and depreciated will have a salvage value of zero at the end of four years.) Variable costs = K x annual revenue, where K is a random variable with a uniform distribution over [0.65, 0.90]. Please note that K may change from year to year. Cost of capital = 10% Annual Demand for CONST-11 is Normal with a mean of 12 and standard deviation of 2. Please round the demand to the nearest integer using the ROUND(X, 0) function, where X is the normal distribution value generated by Crystal Ball. Tax rate: 34% Please note that depreciation is not an out-of-pocket expense. Consequently, it is first subtracted to determine before-tax profit and then added back to determine cash flows. Option 2: Loan to the business associate: Mary will receive R x $150,000 from the business associate at the end of each of the four years and will get her $150,000 back at the end of the fourth year. R is a random variable with a triangular distribution over [0.14, 0.16, 0.20] and may be different from year to year depending on the financial market conditions. Cost of capital and the tax rate are the same as given above. Please note that Mary will not pay taxes on the $150,000 when her associate pays the loan back. Mary will base her decision on the NPV of cash flows over the next four years. Using Crystal Ball (CB) please answer the following questions. Please set the number of trials to 10,000. a. Construct probability distributions for the NPV of the two options and the difference between the NPV of option 1 and the NPV of option 2. For this question please cut and paste the necessary charts/tables from your CB output b. What are the following values: i) Expected value and standard deviation of the NPV of option 1 ii) Expected value and standard deviation of the NPV of option 2 iii) Expected value and the standard deviation of the difference between the NPV of option 1 and the NPV of option 2.

Answer rating: 100% (QA)

The detailed answer for the above question is provided below Step 1 a Construct probability distribu... View the full answer