Set up and execute a Monte Carlo simulation

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Reference no: EM132738383

Problem - Set up and execute a Monte Carlo simulation of the following problem.

Your company is conducting a risk assessment on the construction of an oil pipeline project. If you build the pipeline, you will receive a total of between $200 million to $400 million in royalties over the 20-year life of the pipeline. Unfortunately, there is a risk of a rupture, and if the pipeline ruptures, your company will be liable for $800 million in damages. The probability of a rupture is low, however, at a level of P_rupture = 0.03. If there is a rupture, there is a 0.25 probability that political pressure from the state in which the rupture occurs and unwelcome attention from the US Congress and federal regulators will cause the total losses to the company to quadruple to $3.2 billion.

Assume the income level from royalties is distributed uniformly. Use discrete variables to represent the occurrence of a rupture and the likelihood of government intervention.

What is the expected value (average outcome) of this pipeline project to your company? Out of 10,000 trials, how often will your company experience a loss on this project?

Reference no: EM132738383

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