Question: Project NPV Simulation: Consider a new product development project. In the current year (year 0) and the first year, you invest on the project. The
Project NPV Simulation: Consider a new product development project. In the current year (year 0) and the first year, you invest on the project. The following four years (year 1, 2, 3, and 4) you expect some additional profit (inflows) from this new product.
Cash flows (inflow/outflow) are given in the following tables:
| Year | Minimum Outflow | Most Likely Outflow | Maximum Outflow |
| 0 | $200,000 | $350,000 | $500,000 |
| 1 | $150,000 | $250,000 | $350,000 |
| Year | Minimum Inflow | Most Likely Inflow | Maximum Inflow |
| 1 | $200,000 | $250,000 | $350,000 |
| 2 | $200,000 | $350,000 | $400,000 |
| 3 | $200,000 | $250,000 | $300,000 |
| 4 | $100,000 | $150,000 | $200,000 |
The annual rate of inflation can be approximated with a mean of 3% and standard deviation of 1.5%. The organizations required rate of return is 25%.
a. If you use the most likely values as cash flow estimations (in a deterministic model) without using the simulation method, what is the NPV of the project? Would you recommend undertaking this project?
b. Now simulate the project using triangular distribution for each cash flow. What is the expected NPV? Paste your Crystal Ball output in your answer.
c. What is the probability of having a negative NPV? Paste your Crystal Ball output that shows the probability in your answer.
d. Would you recommend undertaking this project? Why?
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