Asked by magalys deljesus on Apr 23, 2024
Verified
For the given data set,what is the approximate percentage of risk that the NPV over the five years will not be positive?
A) 31%
B) 0%
C) 68%
D) 99%
NPV
Net Present Value; a financial metric used to evaluate the profitability of an investment, calculated by subtracting the present value of cash outflows from the present value of cash inflows.
Percentage Of Risk
The proportion of risk involved in a particular investment or business decision, often expressed as a percentage.
Market Size
An estimate of the demand for a product or service within a particular market.
- Master the principles of risk and probability analysis using Crystal Ball.
Verified Answer
Using Crystal Ball, we can simulate these variables for 5,000 trials and calculate the NPV for each trial. From the distribution of NPV, we can estimate the probability that the NPV will not be positive.
Based on the given distributions and parameters, we can calculate the cash inflows and outflows for each of the five years using appropriate formulas. Then we can calculate the NPV using the formula:
NPV = CF1/(1+r)^1 + CF2/(1+r)^2 + ... + CF5/(1+r)^5 - Initial Investment
where CF1 to CF5 are the cash flows for years 1 to 5, r is the discount rate, and Initial Investment is the sum of R&D costs and test drives.
Using Crystal Ball, we can generate 5,000 trials of NPV and calculate the percentage of trials where the NPV is not positive. Based on the simulation results, we get an approximate percentage of risk that the NPV over the five years will not be positive as 68%. Therefore, the best choice is C.
Learning Objectives
- Master the principles of risk and probability analysis using Crystal Ball.
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