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Simulation with Crystal Ball
Provided Workbook: Mascot Simulation
Relevant Readings:"Discounted Cash Flow Modeling" folder + Textbook Chapter 4.
This is an individual assignment.
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Mascot Industries (B)
Consider Mascot's investment decision modeled in HW2.
Mascot now realizes that some of the assumptions made are not quite correct.
For example, the projected receivables for both machines are rather unreliable. It is likely that such projections will diverge significantly from their originally estimated 4-year mean. A normal distribution around the mean, with twice the originally predicted 4-year standard deviation, sounds reasonable to reflect such uncertainty.
Also, the purchase price of the new machine is not guaranteed. Most likely, Mascot will pay the originally estimated amount but it is possible that the price be as low as $240,000 or as high as $270,000. Mascot agrees that the uncertain purchase price should follow a triangular distribution.
Mascot's CFO wants to evaluate how these uncertain variables might affect the project's net present value.
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Using Crystal Ball, run a simulation in Workbook "Mascot Simulation B" and provide answers to the following questions. Make sure that you copy the full report of your simulation in a separate worksheet.
You will also be asked to load your spreadsheet at the end of this assignment.
Questions.
Using the distributions described above, set up a simulation in the "Crystal Ball Model B" worksheet.
Run 10,000 trials and attach the full report in a worksheet called "simulation B".
In the "Interpretation" worksheet, provide answers to the following questions:
1) Based on simulation results, are you 100% confident that Mascot should acquire the new machine? Explain.
2) How much effort should Mascot allocate at securing the lowest possible purchase price for the new machine? Explain using the simulation results.