Exhibit 11-1A Company Is Considering Investing $1

question 13

Essay

Exhibit 11-1A 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:

Perfectly Elastic

A state of demand or supply in which the quantity demanded or supplied changes infinitely in response to any change in price.

Constant Price

An economic term that refers to prices that have been adjusted for inflation, allowing for comparison of purchasing power over time.

Uniform Price

A pricing strategy where goods or services are sold at the same price to all customers, regardless of the quantity purchased.

Unit-Elastic

Denotes a situation where a one percent change in price leads to an equal one percent change in quantity demanded or supplied.