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is how a project affects their portfolio's risk, not the project's total risk. Capital budgeting & risk, a reading prepared by Pamela Peterson Drake 7 Demonstration of simulation analysis
Suppose that we are making an investment of $80 million in the equipment for a new product. Through research
with our marketing and production management, we have determined the expected price and cost per unit, as
well as the number of units to produce and sell. Along with these estimates, we have a standard deviation that
gives us an idea of the uncertainty associated with these estimates.
For simplicity, we have assumed that these three variables – price, cost, and number of units – are distributed
normally with the mean and standard deviations provided by the company’s management. From the accounting
department, we have an estimate of the range of possible tax rates during the product’s life; we’ve assumed a
uniform distribution for these rates.
This analysis has produced the following:
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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