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Lynly Schroeder

Statistics Homework #4

Assignment 4

NOTES, PART (A):

First, calculate the number of ‘bad’ cartons for each firm and the resulting loss of Market Share using the

following formulas

B C
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)

Market Share Loss

20 Firm A 90 =RiskOutput("Market Loss: A")+C4-ROUND(C15,0)
21 Firm B 88 =RiskOutput("Market Loss: B")+C5-ROUND(C16,0)
22 Firm C 83 =RiskOutput("Market Loss: C")+C6-ROUND(C17,0)

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

New Market Share

34 Firm A 107 =RiskOutput("New Share: A")+C20+C28+C30
35 Firm B 99 =RiskOutput("New Share: B")+C21+C26+C31
36 Firm C 94 =RiskOutput("New Share: C")+C22+C27+C29
Next, create a table to run these weekly Market Share changes for a year (52 rows total, with Market Share from

previous week used as inputs for Market Share of current week).

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.

Output Name Minimum Maximum Mean Std Dev

Market Share: A 122 198 167 10
Market Share: B 64 135 99 12
Market Share: C 3 68 34 12

ANSWER, Part (A): The Mean market share for each firm after one year, based on my simulation, is as

NOTES, Part (B):

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.

Week New A New B New C Inc. Rev Cum. Rev

100 100 100 0 -1000000
1 105 104 91 50,000.00 (950,000)
2 108 107 85 28,571.43 (921,429)
3 120 98 82 111,111.11 (810,317)

50 229 68 3 17,777.78 (140,503)

51 222 75 3 (30,567.69) (171,070)
52 216 81 3 (27,027.03) (198,097)
Also, change the @Risk function for the Weekly Loss of Market Share of A from

=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.

Output Name Minimum Maximum Mean Std Dev

Market Share: A 198 241 222 7
Market Share: B 35 93 66 9
Market Share: C - 44 12 8
Cumulative Revenue (278,302) (76,712) (165,608) 30,308

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

Question 2: #23, Page 1040

NOTES

Begin by building a table that uses @Risk functions to calculate 10 years of market growth in this industry. Use

Pig Growth: =RiskNormal(\$B\$5,\$B\$8)

MKTSHR: =IF(E24=0,\$D\$22,\$D\$22*(1-E24*\$B\$17))

Competitors: =IF(E24<3,MIN(E24+RiskBinomial(3,0.4),3),3)

Actual Profit: =(C24*D24)*(\$B\$18-\$B\$19)

Begin Mkt Shr
Estimated Market Share 38.51%
Year Pig Growth Pig Population MKTSHR Competetors Actual Profit
1 2.27% 1,022,716 38.51% - \$ 708,940
2 4.59% 1,069,641 30.81% 1.00 \$ 593,174
3 4.81% 1,121,074 23.11% 2.00 \$ 466,273
4 4.08% 1,166,859 15.40% 3.00 \$ 323,543
5 6.28% 1,240,105 15.40% 3.00 \$ 343,853
6 3.48% 1,283,283 15.40% 3.00 \$ 355,825
7 4.47% 1,340,611 15.40% 3.00 \$ 371,721
8 4.88% 1,406,070 15.40% 3.00 \$ 389,871
9 4.91% 1,475,078 15.40% 3.00 \$ 409,005
10 4.96% 1,548,182 15.40% 3.00 \$ 429,276

Next, calculate the NPV of the 10-years based on a 10% annual profit discount rate, and assign it to an @Risk

NPV: = RiskOutput("NPV: ")+NPV(B20,F24:F33)

Finally, run the @Risk simulation using 1000 iterations to create the following results table.

Output Name Minimum Maximum Mean Std Dev

Total Revenue: \$ 1,902,958 \$ 7,904,789 \$ 4,024,795 \$ 1,010,703
NPV: \$ 1,177,725 \$ 5,273,019 \$ 2,553,484 \$ 665,236

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

@RISK Student Version

0
1 2.5 4 5.5

Values in Millions

Question 3: #43, Page 1050

NOTES:

Begin by building a table that uses @Risk functions to calculate 10 years of market changes in this industry.

Potential Market: =B43*(1+RiskNormal(\$B\$6,\$B\$9))

Competitors: =IF(C43<5,MIN(C43+RiskBinomial(1,0.2),4),4)

Price: =D43*(1.05)

Cost: =RiskDiscrete(B13:C13,B14:C14)*(1.05)

Mean Sales: =IF(A44<=\$B\$22,ROUND(((\$F\$23-(\$F\$24*C44))*G43) +

((\$F\$25-(\$F\$26*C44))*(B44-G43)),0),0)

Unit Sales: =ROUND(RiskNormal(F44,(0.075*F44)),0)

Profit: =G44*(D44-E44)

Cumulative Profit: =IF(F44=0,0,I43+H44)

To determine the Number of Years total, I used =RISKDISCRETE(B3:F3,B4:F4).

To determine the Development Cost, I used =RiskDiscrete(B17:D17,B18:D18).

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

was somewhat arbitrary.

=RiskOutput("NPV")+NPV(0.05,I43:I52)

Finally, run the @Risk simulation using 1000 iterations to create the following results table.

Output Name Minimum Maximum Mean Std Dev

NPV (\$42,674,000) \$74,257,536 (\$5,638,617) \$18,723,056

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 -

\$30.972,520 and \$41,626,296, with a Standard Deviation of \$18,723,056.

Distribution for NPV/I54
X <=-30972520 X <=41626296
2.5% 97.5%
3.5

M ean =-5638617
3

Values in 10^ -8 2.5

2
@RISK Student Version

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.

Unit Sales/G50 -0.253

@RISK Student Version
Unit Sales/G47 For Academic Use Only 0.214

Unit Sales/G52 -0.185

Competitors/C44 -0.055

Unit Sales/G44 0.044

Competitors/C47 0.031

Competitors/C45 -0.029

-1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1

Std b Coefficients
Question 4

NOTES PART (A) Sub(i):

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

from the Price, using the formulas below.

Exponent: =(\$D\$4-(0.5*\$D\$5^2))*B19+(\$D\$5*RiskNormal(0,1)*SQRT(B19))

Months Exponent Price Value

0.50 0.167634 \$ 82 \$ (12)

I then ran the @Risk simulation using 1000 iterations to create the following results table.

Output Name Minimum Maximum Mean Std Dev

Price at 6 Months \$ 31.47 \$ 156.35 \$ 74.37 \$ 18.67
Put Value \$ (86.35) \$ 38.53 \$ (4.37) \$ 18.67

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.

NOTES PART (A) Sub(ii):

I calculated the value of Portfolio 1 by subtracting the calculated current stock price minus the original stock

Portfolio 1 Value: =RiskOutput("P1 Value")+(D19/(1+\$D\$6/2))-(\$D\$3)

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.

Output Name Minimum Maximum Mean Std Dev

Price at 6 Months \$ 70.65 \$ 78.09 \$ 74.37 \$ 1.16
Put Value \$ (7.89) \$ (0.63) \$ (4.27) \$ 1.13
P1 Value \$ (0.07) \$ 7.18 \$ 3.56 \$ 1.13
P2 Value \$ (0.71) \$ (0.71) \$ (0.71) \$ -
Portfolio 1 Return -0.11% 10.41% 5.16% 1.64%
Portfolio 2 Return -1.16% -1.03% -1.09% 0.02%

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)

Days Exponent Price Knockout? Call Value

1 0.001062 \$ 20.02 NO \$ (0.98)
2 0.001330 \$ 20.03 NO \$ (0.97)
3 0.005964 \$ 20.12 NO \$ (0.88)
4 (0.000626) \$ 19.99 NO \$ (1.01)
5 0.007735 \$ 20.16 NO \$ (0.84)
6 (0.001764) \$ 19.96 NO \$ (1.04)
7 (0.001303) \$ 19.97 NO \$ (1.03)
8 0.000709 \$ 20.01 NO \$ (0.99)
9 0.011490 \$ 20.23 NO \$ (0.77)
10 0.006457 \$ 20.13 NO \$ (0.87)
11 0.008859 \$ 20.18 NO \$ (0.82)
12 0.018253 \$ 20.37 NO \$ (0.63)
13 0.001672 \$ 20.03 NO \$ (0.97)
14 0.009857 \$ 20.20 NO \$ (0.80)
15 0.002586 \$ 20.05 NO \$ (0.95)
16 0.012344 \$ 20.25 NO \$ (0.75)
17 0.008695 \$ 20.17 NO \$ (0.83)
18 0.013862 \$ 20.28 NO \$ (0.72)
19 0.009164 \$ 20.18 NO \$ (0.82)
20 (0.001641) \$ 19.97 NO \$ (1.03)
21 0.026486 \$ 20.54 NO \$ (0.46)

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.

Output Name Minimum Maximum Mean Std Dev

Call Value \$ (1.26) \$ (0.30) \$ (0.80) \$ 0.15

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.