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##### BANA 2082 Business Analytics II Assignment #3 Solution

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Question;The Ford Motor Company is entertaining the development of two new automobiles, the Racer and the Boiler, and they wish to determine which one of the two to advance for introduction into their line of cars. Each model is expected to generate sales for ten years. To determine which model should be built,information was gathered through focus groups with the Marketing department and from experts in the Engineering department and include Fixed Cost of Developing Assumed to be incurred at the beginning of Year 1 (or end of Year 0) before any sales are recorded.Variable Production Cost The variable cost incurred in producing one automobile.Sales Price Assumed to be \$10,000 for each model.Sales of Cars During Each of the Next Ten Years For simplicity assume that all sales occur at the end of each year.Interest Rate It is assumed that cash flows are discounted at 10%. This means that a cash outflow of \$1.00 at the beginning of Year 1 is equivalent to a cash outflow of \$1.10 at the end of Year 1.Fixed and variable costs and annual sales are not known with certainty. The views from consumers for these quantities were summarized by Marketing and include 1. RacerFixed Costs Probability\$6 Billion0.50\$8 Billion0.50Variable Cost\$4,600\$5,400Probability0.500.50Year 1 Sales ProbabilityBoilerFixed Costs Probability\$4 Billion0.25\$5 Billion0.50\$16 Billion0.25Variable Cost\$2,000\$6,000Probability0.500.50Year 1 Sales Probability230,000250,000270,0000.250.500.2580,000220,000390,0000.250.500.25If a model sales well during its first year, it is expected to sell well during later years and likewise if it sales are poor. Ford models this belief with the assumption that:Actual Year t Sales for a Model = Actual Year t-1 Sales + Error TermFor the Racer it is assumed that the error term is normally distributed with a mean of zero and standard deviation of 20,000. For the Boiler, the error term is normally distributed with a mean of zero and standard deviation of 30,000. The error term models the variability of each models sales about the expected sales for each year. Assume that variable cost for each years production is the same and inflation is not beingconsidered. Compare the merits of the two models for being selected as the one to further develop. For your comparison, assume that a. Variable cost for the two models are uniformly distributed on the intervals[4600, 5400] and [2000, 6000], respectively. b. It is unrealistic to assume that Year 1 Racer sales must always equal 230,000, 250,000, or 270,000 cars. A more realistic approach is to assume that any integer value between 230,000 and 270,000 may occur. Model this with a triangular distribution. Do likewise for the Year 1 Boiler sales shown in the table.c. Rather than assuming that it is equally likely to incur \$6 billion or \$8 billion fixed cost for the Racer, likewise model fixed cost as a triangular distribution Do the same for the Boilers fixed cost provided in the table.A. Does the Racer or the Boiler result in the highest expected net present value?B. Does the Racer or the Boiler result in the lowest standard deviation for net present value?C. What are the chances of losing more than \$1 billion in net present value terms for each?D. What observations can you make regarding the riskiness of the two proposed automobiles? Would you choose to introduce the Racer or the Boiler? E. Suppose that the standard deviation for sales for both the Racer and the Boiler is now assumed to be 0.2 of the previous years sales. Modify the spreadsheet to accommodate that and reconsider your answers to A. D.

Paper#52227 | Written in 18-Jul-2015

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