Assignment:
As a project manager, you are involved in a cost reduction project for the ABC Manufacturing Company. The project duration is three years. You have estimated the first year cost as $200000, however cost of the project is expected to go up starting year 2 at a rate X% per year (because of cost of labor, supplies and material). We know that X is normally distributed with mean 5 and Standard Deviation 2. The company will pay you (for your services) in 2 installment of $304000, one at the beginning of the project, and one at the end of year 3. If you desired a rate of return (Interest rate) of 12 percent and inflation is expected to vary between 1 to 5% per year (distributed uniformly) for the next 3 years:
1). Should you take the project? Explain why or why not
2). Determine the risk involved by calculating the probability of no profit
3). What is the chance that you will make at least the desired 12%
4) What is the chance that your NPV will be at most $4000?