R&D Planning. A firm is in the process of assessing the economic prospects for a new bottling machine it is developing. Future research and development expenses could range from $4 to $9 million, with a most likely value around $7 million. The life of the product will be anywhere from 3 to 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.

a. What is the expected NPV for this new machine over ten years?

b. What is the probability of a positive NPV?

(Powell)

Powell, Stephen G. Simulation Using Spreadsheets Custom eText for University of Alabama - Tuscaloosa. Wiley Custom Select, 7/14/15. VitalBook file.