Project NPV Simulation: Consider a new product development project. In the curre
ID: 2730151 • Letter: P
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 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 organization’s 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?
Year
Minimum Outflow
Most Likely Outflow
Maximum Outflow
0
$200,000
$350,000
$500,000
1
$150,000
$250,000
$350,000
Explanation / Answer
At a rate of 8%, we get a npv of positive value which means this
project is desirable.
Based on similar calculations, Internal rate of retrun is turing out
to be close to 18% where as company is expecting 25%. hence not a
desirable project interms of return rate.
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