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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.
 Spring '07
 MEJIAS

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