Evaluation of project alternatives using simulation

Cash flows of a project consist of initial outlay, annual net revenues and scrap value at the end
of the project is 10 years which is a deterministic quantity. All the cash flows have discrete dist
table 1, table 2 and table 3

Table 1: Discrete distribution of initial outlay of the project

1 2 3 4 5
Initial outlay 46000000 48000000 50000000 52000000 54000000
(Rs)
Probability 0.2 0.25 0.3 0.15 0.1

Table 2: Discrete distribution of net annual revenues of the project

1 2 3 4 5

Net annual
revenue 10000000 11000000 12000000 13000000 14000000
(Rs)
Probability 0.15 0.2 0.35 0.25 0.05

Table 3: Discrete distribution of scrap value at the end of life of the project
Year 1 2 3 4
Scrap value 4000000 4500000 5000000 5500000
(Rs)
Probability 0.2 0.45 0.25 0.1

Using simulation, check whether the project is feasible based on present worth method (NPV)
at an interest rate of 15% compunded annually. The feasibility decision should be based on the
total present worth of the project using two simulation runs.
nd scrap value at the end of the life of the project. The life
h flows have discrete distributions as presented from

ent worth method (NPV) of comparision

on should be based on the average of the
Table 1: Initial Outlay

Initial outlay Cummulative probability

(Rs) Probability probability Interval
46000000 0.2 0.2 0-0.19
48000000 0.25 0.45 0.20-0.44
50000000 0.3 0.75 0.45-0.74
52000000 0.15 0.9 0.75-0.89
54000000 0.1 1 0.90-0.99

Description-Cash Random Value of Cash Present Worth

Year flow Number (1) flow(1) Factor(1)
0 Initial outlay 0.64 50000000
1 Revenue (year1) 0.63 12000000 0.86956521739
2 Revenue (year2) 0.09 10000000 0.7561436673
3 Revenue (year3) 0.03 10000000 0.65751623243
4 Revenue (year4) 0.70 13000000 0.57175324559
5 Revenue (year5) 0.03 10000000 0.4971767353
6 Revenue (year6) 0.33 11000000 0.43232759591
7 Revenue (year7) 0.70 13000000 0.37593703992
8 Revenue (year8) 0.66 12000000 0.32690177385
9 Revenue (year9) 0.48 12000000 0.28426241204
10 Revenue (year10) 0.44 12000000 0.24718470612
10 Scrap value 0.20 4500000 0.24718470612
Table 2: Annual Revenues

Annual Revenues Cummulative probability

(Rs) Probability probability Interval
10000000 0.15 0.15 0-0.14
11000000 0.2 0.35 015-0.34
12000000 0.35 0.7 0.35-0.69
13000000 0.25 0.95 0.70-0.94
14000000 0.05 1 0.95-0.99

46000000 10000000
Present Worth(1) 0 0
-50000000 0.19 48000000 0.14 11000000
10434782.6086957 0.44 50000000 0.34 12000000
7561436.67296787 0.74 52000000 0.69 13000000
6575162.32431988 0.89 54000000 0.94 14000000
7432792.19270944
4971767.3529829 0 4000000
4755603.55502712 0.19 4500000
4887181.51900021 0.64 5000000
3922821.28615401 0.89 5500000
3411148.94448175
2966216.47346239
1112331.1775484
669270.342279134

1,020,056
Table 3: Scrap value

Scrap Cummulative probability

(Rs) Probability probability Interval
4000000 0.2 0.2 0-0.19
4500000 0.45 0.65 0.20-0.64
5000000 0.25 0.9 0.65-0.89
5500000 0.1 1 0.90-0.99