3. R&D Planning
A firm is in the process of assessing the economic prospects for a new bottling machine it is developing. Research and development expenses (which will be incurred this year) could range from $6 to $10 million, with a most likely value around $8 million. The life of the product is expected to be 10 years. Yearly unit sales will range from 100 to 500, with a most likely value around 300. The machines will sell for between $20,000 and $25,000 each. The production cost of the machine is expected to be $13,000 but could be as low as $11,000 or as high as $15,000. The firm's discount rate is 10 percent.
You may assume that the probability distributions are triangular (except for the selling price of the machine, which is uniformly distributed). In performing your analysis, you should run 2000 iterations for your simulation.
a. What is the expected NPV for this new machine over ten years?
b. What is the probability of a positive NPV?
Excel-risk programming has to be used.