Table of contents.
BestBikes Ltd. designs, produces and markets a wide variety of bicycles. Currently it is evaluating two new product proposals that have reached the final planning stage, namely a road- and mountain bike. BestBikes Ltd. can only produce one of the two proposed bikes. BestBikes wants to select the bike with the highest return on investment (ROI) and wants to limit the amount of risk.
The calculation of the ROI ratio by BestBikes Ltd. for both proposals gives virtually identical results and therefore more in depth analysis is required. With almost equal ROI ratio's the incurring risk and the impact of these risks on the spread in the possible ROI becomes significant.
Road Bike Mountain Bike
Forecasted maximum sales4,000Forecasted maximum sales2,500
Sales price2,400Sales price3,600
Initial investment240,000Initial investment280,000
Fixed cost60,000Fixed cost100,000
Variable cost1,333Variable cost1,600
Table 1.1: Given figures for Road and Mountain Bike 1
The uncertainties that are important for this investment are:
The sales volume
The variable cost of each product
The initial investment for the Road Bike has a normal distribution with a mean of 240,000 and a standard deviation of 20,000. The variable cost has of the Road Bike has a triangular distribution with min. and max. value 750 and 2,000 respectively and the most potential value set of 1,250.
For the Mountain Bike the initial investment has a triangular distribution with min. and max. value of 100,000 and 600,000 respectively and the most potential value set of 150,000. The variable costs of the Mountain Bike follow a normal distribution with mean of 1.600 and standard deviation of 600. When using Crystal Ball there is a possibility to develop a simulation model which enables you to give insight in the investment problem that BestBike encounters.