Suppose that you are facing an investment option as follows . Right now , you need to
Question:
Suppose that you are facing an investment option as follows . Right now , you need to invest in $10,000 . Then for the following 5 years , you will receive a certain amount of money at the end of each year . The exact amount of money you will receive at the end of each year is uncertain . But with some investigation you believe that at the end of each year the amount of money you will receive follows a general beta distribution with minimum of $2000 and a maximum of $3000, with distribution parameters alpha1= 2 and alpha2= 3.Also , you believe a discount rate of 0.06 is reasonable , given the current economic condition.
a. Assume that the five cash inflows are independent of each other. Conduct a simulation with 1, 000 iterations for the investment problem. What are the expected value and standard deviation of the net present value of the investment? Would you like to go with the investment?
b. Now assume that the cash inflows have some correlation : for any two consecutive cash inflows, there is a correlation coefficient of 0.4. Conduct a simulation with 1,000 iterations for the investment problem . What are the expected value and the standard deviation of the net present value of the investment? Would you like to go with the investment?
