01 Feb Risk Simulation Model/Probabilit

Risk Simulation Model/Probability,

Individual Assignment 5

1) Madeira Manufacturing Company (MMC) is considering the introduction of a new product. Before deciding, they would like you to do a risk analysis of the situation to assess whether the introduction of the new product is a good idea for the company. The (annual) fixed cost to begin production of the new product is $30,000. The variable cost for the product is uniformly distributed between $16 and $24 per unit. The product will sell for $50 per unit. Annual demand for the product is best described by a normal distribution with a mean of 1200 units and a standard deviation of 300 units. (Assume they produce exactly enough units to meet the annual demand.)

a. Develop an @RISK simulation model and run it for 1,000 iterations.

b. According to your simulation results what is the expected annual profit?

c. According to the simulation results what is the probability of making a loss on this new product?

d. Would you recommend MMC introduce this new product? Defend your decision using the simulation output data.

e. How many iterations would you need to estimate expected annual profit for this new product within $50 for a 95 percent confidence level?

2) Strassel Investors buys real estate, develops it, and resells it for a profit. A new property is available, and Bud Strassel, the president and owner of Strassel Investors, believes it can be sold for $160,000. The current property owner asked for bids and stated that the property will be sold for the highest bid in excess of $100,000. Two competitors will be submitting bids for the property. Strassel does not know what the competitors will bid, but he assumes for planning purposes that the amount bid by each competitor will be uniformly distributed between $100,000 and $150,000. Strassel is considering submitting a bid of anywhere between $125000 and $150000 (in increments of $5000) for the property. He has consulted you to help him decide upon the “right” amount to bid for the property in order to maximize his expected profit.

a. Let’s assume that Strassel decides to bid $125000. Build a simulation model corresponding to the above scenario and run it for 5000 iterations to answer parts b, c, and d.

b. Based on your simulation model what is the probability that Strassel will be able to obtain the property with the bid of 125,000?

c. Please provide a 95% confidence interval on your probability estimate from part b.

d. What is the expected profit associated with the bid of $125,000?

e. Rerun your simulation model (5000 iterations each time) using bid amounts of $130,000, $135,000, $140,000, $145,000 and $150,000. You can either run each simulation separately or use risksimtable as discussed in the live session. Based on these simulations which bid amount value would you recommend to Bud Strassel in order to maximize his expected profit?