You are evaluating a project that will require $11,000 initial investment and will last for 5 years. You will use a straight-line depreciation and expect zero salvage value. The cost of capital is 8%. The Year 1 revenue is expected to be $10,500 (), but could be distributed within a normal distribution with a standard deviation () of $930. In Years 2 to 5, revenue is expected to grow from the previous year with of 7% and of 1.5 %. Variable costs are proportional to revenue with of 55% and of 5%. Fixed costs are $2,300 per year. Furthermore, the tax environment is uncertain with of 25% and of 2%. Assume there is no other cash flows involved with this project. (Highlight relevant numbers in your spreadsheet so that I can readily identify them.)

1. Estimate cash flows for this project. Make sure to incorporate all mentioned uncertainties. Assume normal distribution for all uncertainties.

2. Compute the NPV.

3. Run a simulation to compute NPV for 300 times. Compute the and of the 300 NPVs.

4. What is the probability that the NPV will be positive?

5. Plot a histogram to show the simulation result.

6. What are the limitations of Monte Carlo simulation?

7. Should you accept the project?