(A)Use a Simulation Model to Help the Institute Decide How

question 7

Essay

(A)Use a simulation model to help the institute decide how many violins they must reserve with the instrument company.Consider five different possible reservation quantities: 400,500,600,700,800.Which of these quantities yields the highest total revenue,net of instrument costs?
(B)Which simulation yields the largest median total revenue?
(C)Which simulation has the most risk as measured by spread or dispersion in the data? Please state clearly what statistic you used to answer this question.
(D)Are there any simulations in which there is at least a 1 in 20 (i.e.,5%)chance of getting a negative total revenue? Briefly explain in one sentence.
(E)For each simulation what is the probability of exceeding $175,000 in total revenue (approximate these numbers as closely as possible from the data given in the above table).Please put your answer in the following table:
(F)Considering your answers for (A)through (E),please state how many instruments you think should be reserved in advance and explain why.
(G)Suppose the institute is able to negotiate with the instrument company to reduce the cost for a violin from $500 to $350.Re-run the simulation model using the same reservation quantities (but with $350 for the unused instrument cost).Has the reservation quantity that yields the highest average revenue changed? If so,please explain why this has occurred.

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Definitions:

NPV

Net Present Value (NPV) is the calculation used to find the present value of cash flows at a specific discount rate, often used to assess the profitability of an investment.

Payback Period

The amount of time it takes for an investment to generate an amount of income or cash flows to recover the initial capital outlay.

Cash Flows

The net amount of cash and cash-equivalents being transferred into and out of a business, measuring financial health.

Initial Cost

The acquisition cost of an asset or investment, covering all expenses involved in making the asset operational, including purchase price, installation, and setup.