Ok, this is my first time with monte carlo. I've never dealt with it before, Here is the question below. How do i run the part A "which is the best strategy, about the percentage to finance, 40%, 60% and 80% of the initial investment?"
International Metals Corporation (IMC) produces and sells spare parts for heavy equipment and machinery. IMC is planning to expand their operations to supply service parts for new renewable energy corporations. The initial investment is estimated at a minimum of 8 million dollars and a maximum of 10 million. The demand is not known with certainty, because it depends on future incentives the government gives to the sector. The estimated demand is depicted in table 1.
Table 1. Demand forecast in units
Demand from to probability
Low 5,000 10,000 25%
Medium 10,000 15,000 40%
Hi 15,000 20,000 35%
The cost of the raw materials will vary from 80 to 300 dollars per unit. Previous analysis predict that the first year of operations raw materials will be 65% of the cost per unit sold, salaries and wages 20%, and administrative cost 15%. This administrative cost does not consider financial cost nor depreciation cost.
The project team is confident the administrative cost will remain constant through the 12 year lifetime of the project. On the other hand, salaries and wages are expected to increase effectively on average 2% per year with standard deviation of 1%. .
The price per unit sold is expected to fluctuate year after year. IMC commercial policy is to set the prices so the margin will be at least 30% and at most 50%, but the actual margin for future years cannot be predicted for each year at the time of the study.
The project will be financed with a loan for 40% to 80% of the investment and an interest rate of 8% to be paid back in 6 years. For depreciation purposes, MACRS-GDS will be adopted with a category 7 year property. The minimum attractive rate of return is 10%. All figures are at constant dollars, under the assumption
that both cost and revenues will be affected by the inflation, so the managerial team does not require considering inflation to make the decision.
The managerial team needs to know:
which is the best strategy, about the percentage to finance, 40%, 60% and 80% of the initial investment?
Considering the best decision on the amount to be finance, what is the chance of making 50% of the expected value or less
Considering the best decision on the amount to be finance, what is the probability of losing money in the investment?
International Metals Corporation (IMC) produces and sells spare parts for heavy equipment and machinery. IMC is planning to expand their operations to supply service parts for new renewable energy corporations. The initial investment is estimated at a minimum of 8 million dollars and a maximum of 10 million. The demand is not known with certainty, because it depends on future incentives the government gives to the sector. The estimated demand is depicted in table 1.
Table 1. Demand forecast in units
Demand from to probability
Low 5,000 10,000 25%
Medium 10,000 15,000 40%
Hi 15,000 20,000 35%
The cost of the raw materials will vary from 80 to 300 dollars per unit. Previous analysis predict that the first year of operations raw materials will be 65% of the cost per unit sold, salaries and wages 20%, and administrative cost 15%. This administrative cost does not consider financial cost nor depreciation cost.
The project team is confident the administrative cost will remain constant through the 12 year lifetime of the project. On the other hand, salaries and wages are expected to increase effectively on average 2% per year with standard deviation of 1%. .
The price per unit sold is expected to fluctuate year after year. IMC commercial policy is to set the prices so the margin will be at least 30% and at most 50%, but the actual margin for future years cannot be predicted for each year at the time of the study.
The project will be financed with a loan for 40% to 80% of the investment and an interest rate of 8% to be paid back in 6 years. For depreciation purposes, MACRS-GDS will be adopted with a category 7 year property. The minimum attractive rate of return is 10%. All figures are at constant dollars, under the assumption
that both cost and revenues will be affected by the inflation, so the managerial team does not require considering inflation to make the decision.
The managerial team needs to know:
which is the best strategy, about the percentage to finance, 40%, 60% and 80% of the initial investment?
Considering the best decision on the amount to be finance, what is the chance of making 50% of the expected value or less
Considering the best decision on the amount to be finance, what is the probability of losing money in the investment?
