Aerospace Pty Ltd is a medium size software development company located in Australia. They are planning to introduce a new product into the market. However, in recent times the company has made some bad investment decisions which in turn have impacted their profit bottom line. Thus the senior management requires a thorough analysis of every new product that is introduced to the market. As a senior business analyst, you have been appointed to advise the senior management on the feasibility of the new product. An initial analysis conducted by other analysts for the product claim the anticipated net present value (NPV) for the new product line is over $2 million and they have recommended the manufacture of the product based on this assessment. Your task is to use a decision support system (DSS) and report to the senior management on whether the claim of the NPV being over $2 million is correct or incorrect using the relevant information given in Table 1. 1. Develop a decision support model using Visual DSS using the variables described above. Include comments within your Visual DSS model to explain the variables and your calculations. 2. Based on the result of your model, what is the net present value (NPV)? Explain whether the claim regarding the NPV being above $2 million is correct or incorrect You are now asked to analyse the variations on the impact of market share, cost of producing, overheads and initial investment on the NPV. You need to conduct a risk analysis based on the information below: a) Market share: could be as low as 4% or as high as 18%, but is most likely to be 11%. The distribution could be represented using a triangular distribution. b) Unit costs can be described by normal distribution - mean of $32.00 and standard deviation of $12.00. c) Overhead: could be as low as $100,000 per year or as high as $350,000 per year, but is most likely to be $215,000 per year. The distribution could be represented using a triangular distribution. d) Initial investment requirements can be uniformly distributed between $800,000 and $2,500,000. The senior management decided on the following decision criteria: Decision criteria: The company is unwilling to proceed if there is a 20% or greater chance that the net present value will be less than $1,000,000 (1 million). Your task:
1. You are required to use Visual DSS to run a Monte Carlo simulation (a Risk Analysis).
2. Produce a cumulative probabilities report and graph for the above question. Based on results and the decision criteria, explain whether the senior management should accept or reject the proposed production of the product.
3. When the above analysis reached the Chief Executive Officer (CEO) of your company, he became very concerned about the assumptions made in the model. His experience has taught him to consider the uncertainty associated with selling price and production costs more thoroughly. He required further analysis to be done by incorporating the following uncertainties to Question 1 model:
a) Selling price: uniformly distributed between $70 and $40.
b) Unit costs: normally distributed, mean of $32.00, standard deviation of $5.00. He applied different decision criteria and was willing to go ahead with the product proposal if there was at least an 80% chance the net present value would be greater than $1,000,000.