Former President Suharto of Indonesian once famously dismissed the concern over his country’s corruption by saying: Well you come out here from Washington with these high ideas to tell us….
The number of days that the machine will be hired out in year 1 and in year 2;
(This exercise is really designed to be carried out by a group of people, with each individual using a different set of random numbers. The individual results can then be combined by using the table at the end of the question.) An equipment hire company has to decide whether to buy a specialized piece of earth-digging machinery for $6000. The machine would be sold after two years. The main factors which it is thought will affect the return on the investment are:
(i) The revenue generated by hiring the machine out for a day: it is certain that this will be $40;
(ii) The number of days that the machine will be hired out in year 1 and in year 2;
(iii) The costs of having the machine available for hire (e.g. maintenance and repair costs) in year 1 and year 2;
(iv) The price which will be obtained for the machine when it is sold at the end of year 2.
For each factor the following probability distributions have been estimated:
Carry out one simulation of a possible combination of circumstances and calculate the NPV for your simulation. Use a discount rate of 10%.
The results for the entire group can then be entered into the following table:
Therefore the most likely range for the NPV appears to be ……. and the probability of a negative NPV appears to be ………..