CE#4		Fall 2010

The following problem was assigned previously for HWQ7

A 2-year project will require a certain investment of $10 M.  After-tax cash flows for years 1 and 2 have the following expected values and standard deviations:

	end-of-year n		E[An]		   σ[An]
		1		$ 7 M		$ 0.5 M
		2		   8 M		   0.8 M

The MARR is 12%.  Assume the cash flows are statistically independent.

Find E[NPW]  and σ[NPW] for the project.

	Ans.	E[NPW] = $2.628M		σ[NPW] = $0.7785M

Set up a Monte Carlo simulation for the problem.  Assume normal distributions for the end-of-years 1 and 2 cash flows.  Use 5000 trials.

1) Compare your Monte Carlo determined values for E[NPW]  and σ[NPW] with the hand calculated values above.

2) Use the results of your Monte Carlo simulation to estimate the cumulative distribution function for NPW.  That is, find CDF(NPW).

3) Using your Monte Carlo determined CDF(NPW) function,  E[NPW],  and σ[NPW], find:

	a) Prob [ NPW < 0 ]

	b) Prob [ E[NPW] – σ < NPW <  E[NPW] + σ ]


You turn-in should include (hard copy only please):

a) a printout showing the first ten trial results and the last ten trial results plus the rows showing the Monte Carlo determined  E[NPW]  and σ[NPW].  (Do this before you sort rows for the CDF requirement.)

	b)  an Excel developed plot showing the Monte Carlo determined CDF(NPW)

c)  a hand written summary table comparing E[NPW]  and σ[NPW] determined by Monte Carlo to E[NPW]  and σ[NPW] determined by the hand calculation

	d) hand written answers to the questions posed in 3) above