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Statistics Homework #4
Assignment 4
First, calculate the number of ‘bad’ cartons for each firm and the resulting loss of Market Share using the
following formulas
B C
Actual Bad Cartons
15 Firm A 10 =ROUND(RiskBinomial(C4,C9),0)
16 Firm B 12 =ROUND(RiskBinomial(C5,C10),0)
17 Firm C 17 =ROUND(RiskBinomial(C6,C11),0)
Next, calculate the number of families moving from one firm to another and the resulting new Market Share.
Note that C27, C29 and C31 were not calculated using the RiskBinomial function, as the maximum number of
Families Switching can be no greater than the number lost ( [A to B] + [A to C] = [Market Share Loss for A]).
B C
Families Switching Firms
26 A to B 4 =ROUND(RiskBinomial(C15,C21/(C21+C22)),0)
27 A to C 6 =C15-C26
28 B to A 7 =ROUND(RiskBinomial(C16,C20/(C20+C22)),0)
29 B to C 5 =C16-C28
30 C to A 10 =ROUND(RiskBinomial(C17,C20/(C20+C21)),0)
31 C to B 7 =C17-C30
Week Loss A Loss B Loss C Adj A Adj B Adj C A->B A->C B->A B->C C->A C->B New A New B New C
0 0 0 100 100 100 0 0 0 0 0 0 100 100 100
1 11 16 25 87 88 76 6 3 9 6 13 11 106 109 85
2 10 11 17 93 98 71 4 3 4 2 9 7 109 115 76
3 9 10 10 102 95 61 6 5 7 8 3 7 122 104 74
50 13 18 12 147 79 36 8 9 15 4 7 1 158 93 49
51 13 11 9 143 85 38 12 5 10 3 6 4 155 99 46
52 22 19 12 138 83 39 16 6 13 - 7 3 158 97 45
Finally, run the @Risk simulation using 1000 iterations to create the following results table.
ANSWER, Part (A): The Mean market share for each firm after one year, based on my simulation, is as
Using the same data as in Part (A), add two columns to the 52-week table: Cumulative Revenue starts with -$1
Million to represent the initial investment, and Incremental Revenue measures the increase (or decrease) in
Market Share over the previous week and adds (or subtracts) $10,000 for each 1% change.
=ROUND(RiskBinomial(R2,$C$9),0) TO =ROUND(RiskBinomial(R2,$C$9)/2,0)
in order to cut the percentage of unsatisfactory juice cartons in half for company A.
Finally, run the @Risk simulation using 1000 iterations to create the following results table.
ANSWER, PART(B):
The mean Market Share for company A does significantly increase with the investment of $1MM to reduce the
number of unacceptable juice cartons. This simulation shows an increase of 55 families from 167 (in part A) to
222 (in part B). However, the increased Market Share does not provide sufficient Cumulative Revenue to offset
NOTES
Begin by building a table that uses @Risk functions to calculate 10 years of market growth in this industry. Use
MKTSHR: =IF(E24=0,$D$22,$D$22*(1-E24*$B$17))
Competitors: =IF(E24<3,MIN(E24+RiskBinomial(3,0.4),3),3)
Next, calculate the NPV of the 10-years based on a 10% annual profit discount rate, and assign it to an @Risk
Finally, run the @Risk simulation using 1000 iterations to create the following results table.
The mean NPV for Mutron, using the simulation outlined above is $2,553,484.
Using @Risk Results window, we can modify the value of the left and right slider in the NPV Distribution
graph such that the values are 2.5% and 97.5%. This gives the confidence interval of 95% for Mutron’s actual
NPV. As shown in the graph below, Mutron can be 95% certain that the actual NPV will be between $1,423,556
and $3,925,667.
Distribution for NPV: /F35
X <=1423556 X <=3925667
2.5% 97.5%
7
Mean = 2553484
6
5
Values in 10^ -7
0
1 2.5 4 5.5
Values in Millions
NOTES:
Begin by building a table that uses @Risk functions to calculate 10 years of market changes in this industry.
Competitors: =IF(C43<5,MIN(C43+RiskBinomial(1,0.2),4),4)
Price: =D43*(1.05)
Cost: =RiskDiscrete(B13:C13,B14:C14)*(1.05)
(($F$25-($F$26*C44))*(B44-G43)),0),0)
Profit: =G44*(D44-E44)
Year PotMarket Competitors Price Cost Mean Sales Unit Sales Profit Cum Profit
1 1,000,000 1 $ 10.00 $ 6.00 160,000 144,667 $ 578,668 $ (9,421,332)
2 1,056,779 2 $ 10.50 $ 6.30 210,720 237,334 $ 996,803 $ (8,424,529)
3 1,112,049 2 $ 11.03 $ 6.62 - - $ - $ -
4 1,162,514 2 $ 11.58 $ 6.95 - - $ - $ -
5 1,201,933 3 $ 12.16 $ 7.29 - - $ - $ -
6 1,255,991 4 $ 12.76 $ 7.66 - - $ - $ -
7 1,324,235 4 $ 13.40 $ 8.04 - - $ - $ -
8 1,399,349 4 $ 14.07 $ 8.44 - - $ - $ -
9 1,464,673 4 $ 14.77 $ 8.86 - - $ - $ -
10 1,562,218 4 $ 15.51 $ 9.31 - - $ - $ -
Next, calculate the NPV of the 10-years based on a 5% Annual Discount Rate, and assign it to an @Risk output
using the formula below. Please note that there was no discount rate assigned in the question, so this 5% value
=RiskOutput("NPV")+NPV(0.05,I43:I52)
Finally, run the @Risk simulation using 1000 iterations to create the following results table.
The mean NPV for Toys For U, using the simulation outlined above is -$5,638,617.
Using @Risk Results window, we can modify the value of the left and right slider in the NPV Distribution
graph such that the values are 2.5% and 97.5%. This gives the confidence interval of 95% for Toys For U’s
actual NPV. As shown in the graph below, Toys For U can be 95% certain that the actual NPV will be between -
M ean =-5638617
3
2
@RISK Student Version
1.5 For Academic Use Only
0.5
0
-60 -40 -20 0 20 40 60 80
Values in Millions
This is a very large Standard Deviation, so I ran a sensitivity analysis on the data, as shown below. It reveals a
strong impact by the Development Cost as well as Unit Sales in later years. If Toys For U could find a more
accurate estimate of the development costs, they may find this project has a more positive NPV, allowing them
to reduce risk.
Competitors/C44 -0.055
Competitors/C47 0.031
Competitors/C45 -0.029
Std b Coefficients
Question 4
Using the formula provided to determine Price, I used RISKNORMAL(0,1) to identify a standard normal value
with mean 0 and standard deviation 1. For simplification of the formulas, I calculated the exponents separately
Exponent: =($D$4-(0.5*$D$5^2))*B19+($D$5*RiskNormal(0,1)*SQRT(B19))
I then ran the @Risk simulation using 1000 iterations to create the following results table.
The mean value of the Put after 6 months is -$4.37. It appears that the values provided for the stock volatility
and mean growth rate generally result in an increase in the stock price, making the value of the put option
negative, or zero.
I calculated the value of Portfolio 1 by subtracting the calculated current stock price minus the original stock
Portfolio 2 Value is the value of the put plus the value of the stock on the sale date (6 months). As in Sub (i),
the value of the put is zero, as the stock price is always increasing. However, if you include an assumption that
there was a cost for the put, the return for the Portfolio 2 is slightly smaller than Portfolio 1.
Days Exponent Price Put Value P1 Value P2 Value P1 Return P2 Return
126.00 0.084184 $ 75.06 $ (4.94) $ 4.23 $ (0.71) 6.13% -1.10%
I then ran the @Risk simulation using 1000 iterations to create the following results table.
Portfolio 1 has the higher expected return, due to the expectation that the stock price will increase based on the
provided volatility and mean growth rate. Portfolio 2 is known as portfolio insurance because the Put Option
protects the Put holder from a significant change (in this case decrease) of the stock’s price. If the stock price
falls significantly, the value is partially ‘made up’ by the put option, decreasing the overall impact to the return
of the Portfolio.
NOTES PART (B)
Again, the volatility and mean growth rate of the stock are such that even over 1000 iterations, the stock price
rarely, if ever, rises over the Exercise Price or drops under the Knockout Price.
Based on 1000 iterations, the Call Value is always negative, as the price of the stock never exceeds the $21
Exercise Price, so the fair price for this knockout call option is zero.
NOTE: It was not clear how the Risk-free rate in problem #4 relates to the stock price or return of the call
option. I researched several stock pricing approaches and read up on puts/calls, but aside from using the risk-
free rate as a minimum return on the put/call, I could not find a way to factor in this component. The formula
provided for calculating price is similar to Black-Scholes, which includes a risk-free rate component in the
calculation, but in following the directions of the problem, I did not use the Black-Scholes formula.