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##### STATS - Chapter 7 Monte Carlo Simulation with Crystal Ball Two Problems

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Question;Problem #1Joshua Charles is responsible for the maintenance of a fleet of vehicles used by the power company in constructing and repairing electric transmission lines. Joshua is especially concerned with the cost projections for replacing a large derrick on these vehicles. Joshua has looked at the last 10 years of data and compiled the following table:Number ofDerrick FailuresNumber ofYears1423314151He would like to simulate the number of derrick failures over the next three years. Conduct the simulation for Joshua with at least 5,000 iterations. How common is it for the total number of failures during the three year period to exceed 3?Problem #2Not wanting to leave his beloved alma mater, Will Anderson has come up with a scheme to stay around for 5 more years: He has decided to bid on the fast-food concession rights at the football stadium. He feels sure that a bid of \$60,000 will win the concession, which gives him the right to sell food at football games for the next 5 years. He estimates that annual operating costs will be 40% of salesandannual sales will average \$100,000. His Uncle Josh has agreed to lend him the \$60,000 to make the bid. He will pay Josh \$15,400 at the end of each year. His tax rate is 15%.(a) Use a spreadsheet model to answer the following question. What is Will?s average annual after-tax profit? Assume that the yearly payments of \$15,400 are tax deductible.(b) Suppose that sales will probably vary plus or minus 40% from the average of \$100,000 each year. Will is concerned about the minimum after-tax profit he can earn in a year. He feels that he can survive if it is at least \$20,000. Model annual sales for the 5 years as five continuous uniform random variables. Based on a sample of 7,500 five-year periods (750 periods if using Excel alone), estimate the probability that over any five-year period the minimum after-tax profit for a year will be at least \$20,000. Should Will bid for the concession?

Paper#61658 | Written in 18-Jul-2015

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