Chapter 12 - Simulation : S-1

Chapter 12 Simulation
Note: The solutions you and/or your students obtain to questions in this chapter may not match the solutions given here due to the inherent variability associated with sampling in simulation. Also, you must install the Crystal Ball add-in before you can successfully load and the solution files for these problem. 1. Simulation should be used to analyze models in which one or more of the input or independent variables uncertain or subject to random variability. a. b. See file: Prb12_2.xls Sample size of 100
Histogram
25

2.

Frequency

20 15 10 5 0 9.47 13.06 16.65 Bin 20.24 23.84

c. d.

See file: Prb12_2.xls Sample size of 1,000

Histogram
100

Frequency

80 60 40 20 0 8.77 12.27 15.78 19.28 Bin 22.79 26.29 29.79

e.

A sample, by definition, does not represent the entire population. However, as the sample size increases the sample becomes more representative of the underlying population.

3.

See file: Prb12_3.xls a. Approximately 0.22 b. Approximately $3,200,000 See file: Prb12_4.xls. A reorder point of around 40 and an order quantity of 33 seems to provide the maximum monthly net profit for this item. See file: Prb12_5.xls a. About 33% of the time b. About 67% of the time

4.

5.

Chapter 12 - Simulation : S-2 c. 6. You should switch

See file: Prb12_6.xls a. About 0.0335 b. About 193 seconds. See file: Prb12_7.xls a. Mean = 900, Std Dev = 11.19, P(<920) = 0.9641 b. Mean = 900, Std Dev = 15.74, P(<920) = 0.9048 c. Mean = 900, Std Dev = 7.78, P(<920) = 0.9958 See file: Prb12_8.xls a. $90,000 b. 7, Expected revenue $128,500 c. 1.00 See file: Prb12_9.xls a. 90 b. min $4,390, max $8,190 c. About 55% d. About 36%

7.

8.

9.

10. See file: Prb12_10.xls a. May=70, June=99, July=80, August=57, September=39, October=44, Expected Profit = $15,526 b. Min = 11,500 , Max = 18,585 c. About 13.4% d. 11.5% e. About 99.5% 11. See file: Prb12_11.xls a. 17 b. Expected profit $3,267 c. Order 15, Expected profit $3,127 12. See file: Prb12_12.xls a. Approximately $8,374,000 b. A re-roder point of 650 and order size of 600 produces an average profit of approximately $9.062 million. 13. See file: Prb12_13.xls a. Average Std Dev 95%-LCL 95%-UCL b. 2000 Revenues 5% Increase Prob of at least a 5% increase

$20,819,912 $252,842 $20,797,749 $20,842,075 $19,798,450 $20,788,373 54.40%

14. See file: Prb12_14.xls a Approximately 107 reservations should be accepted. 15. See file: Prb12_15.xls

Chapter 12 - Simulation : S-3 a. b. c. d. e. f. g. Expected value $901,833 95% LCL = $895,349 95% UCL = $908,317 Probability of investment being worth more than $1,000,000 0.11 About $3,700 Contributed $24,000, Balance about $563,753 Contributed $69,000, Balance about $336,795 Invest early and often!

16. See file: Prb12_16.xls a. Greg should deposit about $1,500 per year in his flexible spending account. 17. Teaching Note: Students with weak financial backgrounds might need help with the concept of NPV. See file: Prb12_17.xls a. The student is forced to make some decisions about what RNGs to use (just like in the real-world). I chose symmetric triangular distributions to model R&D costs, Annual Units Sold, and Unit Manufacturing Costs. The Market Life of the product should be modeled as a discrete uniform random variable. b. Expected NPV $2.0 million c. Probability of positive NPV 0.77 18. a. b. c. See file: Prb12_18.xls Average donation per answered door $11.87 Total expected donations 300*11.87*.75 = $2,670

19. See file: Prb12_19.xls a. Average total cost $399,827 b. 53 hours, Average total cost $351,886 c. An increase in the replacement cost should lead to an increase in the optimal planned replacement time. d. An increase in the cost of lost production time should lead to a decrease in the optimal planned replacement time. 20. a. b. c. d. See file: Prb12_20.xls See file: Prb12_20.xls Probability of making at least $12,000 net profit in each of the next 5 years 0.612 Probabilty of making $60,000 total in the next 5 years 0.998

21. See file: Prb12_21.xls a. About $9.15. b. About 22% 22. See file: Prb12_22.xls a. About $2,407,000 b. Invested $32,000, Total $1,158,000 c. Invested $170,078, Total $1,161,000 d. Invest early. 23. a. b. c. d. e. f. See file: Prb12_23.xls Worst case: -$320,000 Best case: $354,000 -$144,540 $132,950 Ask for (or buy an option on) a delay to sign the lease agreement. Offer insentivite to get an earlyier decision on the large order. Make a targeted sales effort to obtain additional orders for this product.

Chapter 12 - Simulation : S-4

24. a.

b.

See file: Prb12_24.xls The optimal number of papers to order is approximately 54 which produces an expected profit of approximately $9.31. 95% Lower Confidence Limit $9.06 95% Upper Confidence Limit $9.56 See file: Prb12_25.xls
Forecast: Total Weekly Claims 2,000 Trials
.031

25. a. b.

Frequency Chart

69 O utlie rs
62

.023

46.50

.016

31

.008

15.5

.000 $1,207 $9,739 $18,272 $26,804 $35,337

c. d. e. 26. a. b. c. d. 27. a. b. c.

Average weekly total claims $11,856 Probability of total weekly claims exceeding $20,000 0.15 95% LCL = 0.118, 95% UCL = 0.181 See file: Prb12_26.xls $991,000 $27,000 The capacity should be 1,375,000 units. See file: Prb12_27.xls Probability of selling at least 10 cars 0.29 The expected value of the bonus is 0.29*$5,000 = $1,450. The amount we should be willing to spend on advertising depends on the estimated effectiveness of the advertising in terms of: 1) increasing the customer count, and 2) increasing the probability of a customer buying a car. So there is no single "right" answer to this question.

28. See file: Prb12_28.xls a. Average weekly revenue $2,466 b. Average weekly revenue $2,323 c. Average weekly revenue $2,481 29. a. b. See file: Prb12_29.xls 8 employees should be scheduled as follows: Time Start Time Start 0:00 0 12:00 1 1:00 0 13:00 0 2:00 0 14:00 0 3:00 0 15:00 0 4:00 0 16:00 1 5:00 0 17:00 0

Chapter 12 - Simulation : S-5 6:00 7:00 8:00 9:00 10:00 11:00 4 0 0 0 1 0 18:00 19:00 20:00 21:00 22:00 23:00 0 0 0 0 1 0

30. a. b. c. d. 31. a. b. c. d.

See file: Prb12_30.xls About $9.90 About $9.63 About 20% See file: Prb12_31.xls About $7.39 About $7.12 About 86%

32. See file: Prb12_32.xls a. 10.98% b. Expected return = 14.52%, St dev = 4.96%

c.

33. See file: Prb12_33.xls a. $23,051 b. $21,607 c. Yes. 34. See file: Prb12_34.xls a. Approximately $291,000 b. Michael should order 24,000 sweatshirts

Chapter 12 - Simulation : S-6 35. See file: Prb12_35.xls a. Min = -$649,965, Max = $1,269,321, Average = $318,623 b. Approximately 0.845 c. Yes. 36. See file: Prb12_36.xls The company should accrue about $39.5 million.

Case12-1: Live Well Die Broke

See file: Case12_1.xls a. b. c. Withdrawal amount $55,500. Ending balance $837,000. Withdrawal amount $55,500. Ending balance $1 million.
$59,000 $58,000

Withdrawal amount

$57,000 $56,000 $55,000 $54,000 $53,000 $52,000 $51,000 $50,000 0% 2% 4% 6% 8% 10% 12% Prob of <$0 at death

d.

Withdrawal amount $52,000.

Case12-2: Death And Taxes

Note: The first seven questions in this case do not require the use of simulation. See file: Case12_2.xls a. b. c. d. e. f. g. h. i. j. 76.57 0.3417 0.0490 78.51 0.4120 0.059 The person runs out of money at age 83. P(65 year old male living to >= 82) = 0.2031 0.223 0.451 $79,000

Case 12-3: The Sound's Alive Company

(contributed by Jack Yurkiewicz, Pace University) See file: Case12_3.xls Based on a simulation run with 500 replications, the following results were obtained (where all currency figures are in $1,000s): Net Profit Venture

Chapter 12 - Simulation : S-7 2004 $617.9 2005 $798.72 0.082 2006 $1002.49 2007 $1,231.79 NPV $3,192.32

Average:

P( NPV >= $5 million):

According to these results, there is only a small (0.082) chance that this venture would generate an NPV of at least $5 million. Thus, Marissa should probably not undertake this venture.

Case 12-4: The Foxridge Investment Group

a. b. c. d. e. See file: Case12_4.xls 95% LCL = $2,710 95% UCL = $3,289 About 0.802 Yes. 95% LCL = -$558 95% UCL = -$27 0.432 Probably not. About 11.25%

f.