Orange Tech (OT) is a software company that provides a suite of programs that are essential to everyday business computing. OT has just enhanced its software and released a new version of its programs. For financial planning purposes, OT needs to forecast its revenue over the next few years. To begin this analysis, OT is considering one of its largest customers. Over the planning horizon, assume that this customer will upgrade at most once to the newest software version, but the number of years that pass before the customer purchases an upgrade varies. Up to the year that the customer actually upgrades, assume there is a 0.50 probability that the customer upgrades in any particular year and that the customer will upgrade in 25 years if they haven't already by that point. In other words, the upgrade year of the customer is a (discrete) random variable. For guidance on an appropriate way to model upgrade year, refer to Appendix 13.1. Furthermore, the revenue that OT earns from the customer's upgrade also varies (depending on the number of programs the customer decides to upgrade). Assume that the revenue from an upgrade obeys a normal distribution with a mean of $100,000 and a standard deviation of $25,000. (a) Construct a simulation model that computes the net present value of the revenue from the customer upgrade. Hint: Excel's NPV function computes the net present value for a sequence of cash flows that occur at the end of each period. To correctly use this function for cash flows that occur at the beginning of each period, use the formula =NPV(discount rate, flow range) + initial amount, where discount rate is the annual discount rate, flow range is the cell range containing cash flows for years 1 through n, and initial amount is the cash flow in the initial period (year 0). Use an annual discount rate of 10%. (Use at least 1,000 trials.) What is the average net present value (in $) that OT earns from this customer? (Round your answer to two decimal places.) $1000 X (b) What is the standard deviation of net present value (in $)? (Round your answer to two decimal places.) Over thousands more trials, how would you expect this value to compare to the standard deviation of the revenue? Explain. O We would expect the standard deviation of the revenue to be greater than that of the net present value since the net present value depends on two uncertain quantities. O We would expect the standard deviation of the net present value to be greater than that of the revenue since the net present value depends on two uncertain quantities. We would expect the standard deviation of the net present value to be greater than that of the revenue since the net present value depends on one uncertain quantity. We would expect the standard deviation of the revenue to be greater than that of the net present value since the revenue depends on two uncertain quantities. O We would expect both the standard deviation of the net present value and that of the revenue to be roughly the same since they both depend on the same number of uncertain quantities.
Orange Tech (OT) is a software company that provides a suite of programs that are essential to everyday business computing. OT has just enhanced its software and released a new version of its programs. For financial planning purposes, OT needs to forecast its revenue over the next few years. To begin this analysis, OT is considering one of its largest customers. Over the planning horizon, assume that this customer will upgrade at most once to the newest software version, but the number of years that pass before the customer purchases an upgrade varies. Up to the year that the customer actually upgrades, assume there is a 0.50 probability that the customer upgrades in any particular year and that the customer will upgrade in 25 years if they haven't already by that point. In other words, the upgrade year of the customer is a (discrete) random variable. For guidance on an appropriate way to model upgrade year, refer to Appendix 13.1. Furthermore, the revenue that OT earns from the customer's upgrade also varies (depending on the number of programs the customer decides to upgrade). Assume that the revenue from an upgrade obeys a normal distribution with a mean of $100,000 and a standard deviation of $25,000. (a) Construct a simulation model that computes the net present value of the revenue from the customer upgrade. Hint: Excel's NPV function computes the net present value for a sequence of cash flows that occur at the end of each period. To correctly use this function for cash flows that occur at the beginning of each period, use the formula =NPV(discount rate, flow range) + initial amount, where discount rate is the annual discount rate, flow range is the cell range containing cash flows for years 1 through n, and initial amount is the cash flow in the initial period (year 0). Use an annual discount rate of 10%. (Use at least 1,000 trials.) What is the average net present value (in $) that OT earns from this customer? (Round your answer to two decimal places.) $1000 X (b) What is the standard deviation of net present value (in $)? (Round your answer to two decimal places.) Over thousands more trials, how would you expect this value to compare to the standard deviation of the revenue? Explain. O We would expect the standard deviation of the revenue to be greater than that of the net present value since the net present value depends on two uncertain quantities. O We would expect the standard deviation of the net present value to be greater than that of the revenue since the net present value depends on two uncertain quantities. We would expect the standard deviation of the net present value to be greater than that of the revenue since the net present value depends on one uncertain quantity. We would expect the standard deviation of the revenue to be greater than that of the net present value since the revenue depends on two uncertain quantities. O We would expect both the standard deviation of the net present value and that of the revenue to be roughly the same since they both depend on the same number of uncertain quantities.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![Orange Tech (OT) is a software company that provides a suite of programs that are essential to everyday business computing. OT has just enhanced its software and released a new version of its programs. For financial planning
purposes, OT needs to forecast its revenue over the next few years. To begin this analysis, OT is considering one of its largest customers. Over the planning horizon, assume that this customer will upgrade at most once to the
newest software version, but the number of years that pass before the customer purchases an upgrade varies. Up to the year that the customer actually upgrades, assume there is a 0.50 probability that the customer upgrades in
any particular year and that the customer will upgrade in 25 years if they haven't already by that point. In other words, the upgrade year of the customer is a (discrete) random variable. For guidance on an appropriate way to
model upgrade year, refer to Appendix 13.1. Furthermore, the revenue that OT earns from the customer's upgrade also varies (depending on the number of programs the customer decides to upgrade). Assume that the revenue
from an upgrade obeys a normal distribution with a mean of $100,000 and a standard deviation of $25,000.
(a) Construct a simulation model that computes the net present value of the revenue from the customer upgrade. Hint: Excel's NPV function computes the net present value for a sequence of cash flows that occur at the end of
each period. To correctly use this function for cash flows that occur at the beginning of each period, use the formula =NPV(discount rate, flow range) + initial amount, where discount rate is the annual discount rate, flow range
is the cell range containing cash flows for years 1 through n, and initial amount is the cash flow in the initial period (year 0). Use an annual discount rate of 10%. (Use at least 1,000 trials.)
What is the average net present value (in $) that OT earns from this customer? (Round your answer to two decimal places.)
$1000
X
(b) What is the standard deviation of net present value (in $)? (Round your answer to two decimal places.)
Over thousands more trials, how would you expect this value to compare to the standard deviation of the revenue? Explain.
O We would expect the standard deviation of the revenue to be greater than that of the net present value since the net present value depends on two uncertain quantities.
O We would expect the standard deviation of the net present value to be greater than that of the revenue since the net present value depends on two uncertain quantities.
We would expect the standard deviation of the net present value to be greater than that of the revenue since the net present value depends on one uncertain quantity.
We would expect the standard deviation of the revenue to be greater than that of the net present value since the revenue depends on two uncertain quantities.
O We would expect both the standard deviation of the net present value and that of the revenue to be roughly the same since they both depend on the same number of uncertain quantities.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd1d0b4c5-935c-4ebc-bb6f-11a1b1e0113e%2F646a09b9-6250-42df-ab9a-b66e9d97eada%2F87556a_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Orange Tech (OT) is a software company that provides a suite of programs that are essential to everyday business computing. OT has just enhanced its software and released a new version of its programs. For financial planning
purposes, OT needs to forecast its revenue over the next few years. To begin this analysis, OT is considering one of its largest customers. Over the planning horizon, assume that this customer will upgrade at most once to the
newest software version, but the number of years that pass before the customer purchases an upgrade varies. Up to the year that the customer actually upgrades, assume there is a 0.50 probability that the customer upgrades in
any particular year and that the customer will upgrade in 25 years if they haven't already by that point. In other words, the upgrade year of the customer is a (discrete) random variable. For guidance on an appropriate way to
model upgrade year, refer to Appendix 13.1. Furthermore, the revenue that OT earns from the customer's upgrade also varies (depending on the number of programs the customer decides to upgrade). Assume that the revenue
from an upgrade obeys a normal distribution with a mean of $100,000 and a standard deviation of $25,000.
(a) Construct a simulation model that computes the net present value of the revenue from the customer upgrade. Hint: Excel's NPV function computes the net present value for a sequence of cash flows that occur at the end of
each period. To correctly use this function for cash flows that occur at the beginning of each period, use the formula =NPV(discount rate, flow range) + initial amount, where discount rate is the annual discount rate, flow range
is the cell range containing cash flows for years 1 through n, and initial amount is the cash flow in the initial period (year 0). Use an annual discount rate of 10%. (Use at least 1,000 trials.)
What is the average net present value (in $) that OT earns from this customer? (Round your answer to two decimal places.)
$1000
X
(b) What is the standard deviation of net present value (in $)? (Round your answer to two decimal places.)
Over thousands more trials, how would you expect this value to compare to the standard deviation of the revenue? Explain.
O We would expect the standard deviation of the revenue to be greater than that of the net present value since the net present value depends on two uncertain quantities.
O We would expect the standard deviation of the net present value to be greater than that of the revenue since the net present value depends on two uncertain quantities.
We would expect the standard deviation of the net present value to be greater than that of the revenue since the net present value depends on one uncertain quantity.
We would expect the standard deviation of the revenue to be greater than that of the net present value since the revenue depends on two uncertain quantities.
O We would expect both the standard deviation of the net present value and that of the revenue to be roughly the same since they both depend on the same number of uncertain quantities.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 1 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Recommended textbooks for you
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![Principles of Economics (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781305585126/9781305585126_smallCoverImage.gif)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Managerial Economics: A Problem Solving Approach](https://www.bartleby.com/isbn_cover_images/9781337106665/9781337106665_smallCoverImage.gif)
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
![Managerial Economics & Business Strategy (Mcgraw-…](https://www.bartleby.com/isbn_cover_images/9781259290619/9781259290619_smallCoverImage.gif)
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education