The bertz merchandising company uses a simulation approach

Reference no: EM131093618

The Bertz Merchandising Company uses a simulation approach to judge investment projects. Three factors are employed: market demand, in units; price per unit minus cost per unit (on an after-tax basis); and investment required at time 0. These factors are felt to be independent of one another. In analyzing a new "fad" consumer product with a one-year product life, Bertz estimates the following probability distributions:

MARKET DEMAND		PRICE MINUS COST PER UNIT_(After-tax)		INVESTMENT REQUIRED
PROBABILITY	UNITS	PROBABILITY	DOLLARS	PROBABILITY	DOLLARS
0.15	26,000	0.30	$6.00	0.30	$160,000
0.20	27,000	0.40	6.50	0.40	165,000
0.30	28,000	0.30	7.00	0.30	170,000
0.20	29,000	1.00		1.00
0.15	30,000
1.00

a. Using a table of random numbers or some other random process, simulate 20 or more trials of these three factors, and compute the internal rate of return on this one-year investment for each trial.

b. Approximately, what is the most likely return? How risky is the project?

Reference no: EM131093618

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