COR corp is considering investing in a production facility that costs $100M to set up and has a functional life of 10 years (see detailed data below). If the project exhibits two years of consecutive negative growth, COR can abandon the project and sell it at salvage value.
1. What is the probability of losing money on this project?
2. What is the probability of COR keeping this investment for the full functional life?
ACME Corp is considering investing in a production facility that costs $10M to set up and has a functional life of 10 years. Data is outlined below.
1. What is the probability of losing money on this investment?
2. What is the probability of generating more than $500,000 on this investment?
3. What is the most likely IRR that this project will generate?
WEC Corp manufactures highly specialized parts for jet engines. One of their production lines is fan blades for turbines. WEC uses simulation analysis to estimate their annual profit fromits production lines. See data on this specific production line below.
1. What is the probability of losing money on this production line in the next year?
2. WEC is considering building a facility that would allow it to recycle discarded units that failed inspection. See details below. What would be the probability of yielding a positive return for the year from this facility?
RR Corp is considering three different projects: Alpha, Beta, and Gamma. All three projects have a 10 year functional life and $100M set up cost. See other details below.
1. Based on their NPV (with the stochastic WACC), whichproject/s should RR Corp take on if they were to accept just one? Just two?
It asks to calculate growth rate starting year 2. Year 1 has no growth rate, so project would run at least 3 years. Just set flag for year 2 to 1. Your project life calculation is shorter by 1 year (you’re not adding the year project is abandoned). Add 1 subject to maximum of 10.
I also did yearly analysis, same as yours, only difference is that you’ve assumed WACC is same for 10 years. I assumed WACC varies yearly as per given distribution. I feel my assumption is better suited for this problem, but you may confirm with your professor. Otherwise, everything else is right in your answer (just change to line graph to show all three distributions better).
You’ve included fixed costs each month, it should be added only in month 0.
But post production costs formula includes fixed costs also, that’s why the former can’t be calculated monthly. It should be a single cumulative number at the end of analysis period. I had also tried with monthly data, but later shifted to yearly.