You have an option buy a prepaid weekly (Monday through Friday) lunch plan at your office. You
Question:
You have an option buy a prepaid weekly (Monday through Friday) lunch plan at your office. You can buy up to five lunches per week at a cost of $10 per lunch and only you can use the pre-paid lunches. For example, if you buy four pre-paid lunches the weekly cost is $40. Any pre-paid lunches not use by Friday are lost. If you run out of pre-paid lunches any week you can pay out of pocket for lunch and the cost for one non-prepaid lunch is normally distributed with a mean of $12.50 and a standard deviation of $2.00. For example, if you prepay for two lunches and eat lunch at the office four times in a week you will pay for two lunches out of pocket.
The expected cost and standard deviation of weekly cost for non-prepaid lunches is calculated for you in Excel and shown below: For example, the cost of two non-prepaid lunches is normally distributed with a mean and standard deviation of $25.00 and $2.83 respectively. The estimated discrete probability distribution for total lunches eaten at the office weekly. Inputs are shown to the left.
Create a simulation with 100 trials for purchasing 0 to 5 lunches per week.
How many PrePaid lunches should be purchased to yield the lowest expected cost?
What is the expected cost of the lowest cost plan?
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers