cbrisk_2

75 005 minimum maximum tax rate 35 45 we assume that

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Unformatted text preview: Mean Standard deviation Number of units 10,000,000 1,000,000 Price per unit $14 $2 Expense per unit $0.75 $0.05 Minimum Maximum Tax rate 35% 45% We assume that the product will be produced and sold for the foreseeable future. Using Microsoft Excel® 1 , we simulated 1,000 draws (that is, 1,000 random selections from each of the four variables’ distributions) using the above information and calculated the product’s internal rate of return for each of these draws. The spreadsheet consists of distribution specifications and the results of the random draws: 2 The result is a distribution of possible internal rates of return for the product, as depicted in the histogram. 120 100 80 Frequency 60 40 20 0 53% 50% 47% 44% 41% 38% 35% 32% 29% 27% 24% 21% 18% 15% 12% 9% IRR The height of this distribution is the number of draws (out of the possible 1,000 replications) for which the IRR fell into the range of IRRs depicted in the horizontal axis. In terms of risk, the wider the dispersion of possible IRRs relative to the expected IRR, the greater the product’s risk. 3. Measuring a project's market risk If we are looking at an investment in a share of stock, we could look at that stock's re...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at Arizona.

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