You are trying to estimate NPV of profit for a newcomputer product, which you are confident will sell for tenyears. You are given the following information.The hurdle rate is 15%. Assume end of year for profits.The total cost of developing the product will be spreadequally over the product’s life. Total development cost willbe between $2 billion and $11 billion. There is a 25% chancethat total fixed cost is $3 billion or less, a 50% chance of $6billion or less, and a 75% chance of $9 billion or less.The total year 1 market size (in terms of annual unitsales) is unknown but is believed to be between 0 and 600million units. Unit sales of 100 million and 500 million areequally likely. Unit sales of 200 million and 400 million areequally likely, and are 4 times as likely as sales of 100million. Sales of 300 million are 5 times as likely as salesof 100 million. Each year, market growth is expected toaverage 5%, and during each year we are 95% sure thatmarket growth will be between 3% and 7%.Our most likely year 1 market share is 30%. There is a5% chance that our market share will be less than or equalto 10% and a 5% chance that our market share will be morethan 40%. A triangular distribution appears to be reasonablefor market share. In later years, we expect market share, onaverage, to equal the previous year’s share, but there is a95% chance that market share could change by up to 20%of its current value.The year 1 price charged for each unit follows a triangularrandom variable, with the most likely value $50, worstcase $45, and best case $60. Each year, unit price willincrease 5%.The year 1 unit variable cost of production follows atriangular random variable with worst case $30, best case$20, and most likely case $24. Each year, variable costs willincrease 5%. a You are 95% sure that the mean NPV of the projectis between _____ and _____. Run 1,600 iterations. b What is the chance that this project will meet its hur-dle rate? c What are key drivers of the project’s profitability?
You are trying to estimate NPV of profit for a newcomputer product, which you are confident will sell for tenyears. You are given the following information.The hurdle rate is 15%. Assume end of year for profits.The total cost of developing the product will be spreadequally over the product’s life. Total development cost willbe between $2 billion and $11 billion. There is a 25% chancethat total fixed cost is $3 billion or less, a 50% chance of $6billion or less, and a 75% chance of $9 billion or less.The total year 1 market size (in terms of annual unitsales) is unknown but is believed to be between 0 and 600million units. Unit sales of 100 million and 500 million areequally likely. Unit sales of 200 million and 400 million areequally likely, and are 4 times as likely as sales of 100million. Sales of 300 million are 5 times as likely as salesof 100 million. Each year, market growth is expected toaverage 5%, and during each year we are 95% sure thatmarket growth will be between 3% and 7%.Our most likely year 1 market share is 30%. There is a5% chance that our market share will be less than or equalto 10% and a 5% chance that our market share will be morethan 40%. A triangular distribution appears to be reasonablefor market share. In later years, we expect market share, onaverage, to equal the previous year’s share, but there is a95% chance that market share could change by up to 20%of its current value.The year 1 price charged for each unit follows a triangularrandom variable, with the most likely value $50, worstcase $45, and best case $60. Each year, unit price willincrease 5%.The year 1 unit variable cost of production follows atriangular random variable with worst case $30, best case$20, and most likely case $24. Each year, variable costs willincrease 5%.
a You are 95% sure that the mean NPV of the projectis between _____ and _____. Run 1,600 iterations.
b What is the chance that this project will meet its hur-dle rate?
c What are key drivers of the project’s profitability?
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