Problem

1:

Investment Payoff's Case

(15 Points)

A decision maker is working on a problem that requires her to study the uncertainty surrounding the payoff of an

investment.

There are t

hree possible levels of payoff, i.e.,

$1,000, $5,000, and $10,000. As a rough approximation, the decision maker

believes that each possible payoff is equally likely. But she is not fully comfortable with the assessment that each prob

ability

is exactly 1/3, and so would like to conduct a sensitivity analysis. In fact, she believes that each probability could range

from

0 to 0.5

following the uniform distribution

.

The sum of the probabilities must be equal to 1.

(1)

Develop an Excel work

sh

eet

to capture the above scenario.

(2)

R

un

@Risk to

perform the Monte Carlo

simulation

(using the uniform distribution

and 500 iterations

)

that

could

facilitate a sensitivity analysis of the probabilities

of the

payoffs

.

(3)

Attach the simulation graph result

for

the

expected

payoff

as an output.

(4)

Based upon the graph result, what is the probability that the payoff will be less than $

6

,000?

Submit your solution including (1), (2),

(3), and (4

)