Exhibit 11-1
a Company Is Considering Investing $1

question 23

Essay

Exhibit 11-1
A company is considering investing $1.2M in a facility to manufacture a new product. The product will have a five year life, after which the facility will be shut down. A pro forma cash flow sheet for this project, with forecasted production levels, unit prices, and production costs, is shown below:

-[Part 2] Refer to Exhibit 11-1.Suppose that the forecasted price levels shown in the pro forma cash flow sheet are not deterministic,but rather are expected to fluctuate due to market forces.The prices are expected to be normally distributed in each year,with the following means and standard deviations:
Using the appropriate @RISK functions in the pro forma,what is the expected NPV
Would you recommend investing in this project
Explain. $$\begin{array} { c c c c c c } \text { Year } & 1 & 2 & 3 & 4 & 5 \\\text { Mean } & \$ 27.40 & \$ 26.60 & \$ 25.50 & \$ 24.80 & \$ 23.50 \\\text { Std. Dev. } & \$ 5.50 & \$ 5.30 & \$ 5.00 & \$ 4.50 & \$ 4.10\end{array}$$

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Definitions:

Resource Use

The consumption or exploitation of natural resources by humans for manufacturing, energy production, and other economic activities.

Real Rate

The interest rate that has been adjusted to remove the effects of inflation, reflecting the true cost of borrowing.

Nominal Rate

The interest rate before adjustments for inflation, often referred to in the context of loans and savings.

Rate Of Inflation

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.