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Dord Motors is considering whether to introduce a new model: the Racer. The profitability of the Racer will depend on the following factors:
· Fixed cost of developing Racer: Equally likely to be $3 billion or $5 billion.
· Sales: Year 1 sales will be normally distributed with μ = 200,000 and σ = 50,000.
Year 2 sales will be normally distributed with μ = year 1 sales and σ = 50,000.
Year 3 sales will be normally distributed with μ = year 2 sales and σ = 50,000.
For example, if year 1 sales = 180,000, then the mean for year 2 sales will be 180,000.
= Price: Year 1 price = $13,000
Year 2 price = 1.05*{(year 1 price) + $30*(% by which year 1 sales exceed expected year 1 sales)}
The 1.05 is the result of inflation!
Year 3 price = 1.05*{(year 2 price) + $30*(% by which year 2 sales exceed expected year 2 sales)}
For example, if year 1 sales = 180,000, then year 2 price = 1.05*{13,000 + 30(-10)} = $13,335
· Variable cost per car: During year 1, the variable cost per car is equally likely to be $5,000, $6,000, $7,000, or $8,000.
Variable cost for year 2 = 1.05*(year 1 variable cost)
Variable cost for year 3 = 1.05*(year 2 variable cost)
Your goal is to estimate the NPV of the new car during its first three years. Assume that cash flows are discounted at 10%; that is, $1 received now is equivalent to $1.10 received a year from now.
a Simulate 400 iterations and estimate the mean and standard deviation of the NPV the first three years of sales.
b I am 95% sure that the expected NPV of this project is between _____ and _____.
c Use the Target option to determine a 95% confidence interval for the actual NPV of the Racer during its first three years of production.
d Use a tornado graph to analyze which factors are most influential in determining the NPV of the Racer.
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