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"Your company is considering investing in a country that usually has manageable inflation, but where there is a small probability of high annual inflation (more than 20%). If the company invests in the country, it will spend $1678 immediately, and the investment will last 6 years. The net cash flow in ACTUAL dollars from year 1 through year 6 follows a beta distribution with alpha = 1, beta = 1, A = 414, and B = 567. (When alpha = 1 and beta = 1 in a beta distribution, the distribution is identical to a uniform distribution.) Each year's cash flow follows the same distribution and is independent of the other years. (In other words, you need 6 beta random variables, one for each year.) The general inflation rate is also uncertain. The inflation rate follows a lognormal distribution, where the 50th %ile = 0.04 and the 0.9th %ile = 0.12 where the inflation rate is expressed as a decimal (not as a percentage). Assume the inflation rate remains the same in each year. Use SIPmath with 100,000 trials to calculate average or expected net present worth of the investment. The company's INFLATION-FREE MARR is 19%."

Financial Management, Finance

  • Category:- Financial Management
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