SIMULATION CHAPTER 15. Basic Concepts
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1 CHAPTER 15 SIMULATION Basic Concepts Monte Carlo Simulation The Monte Carlo method employs random numbers and is used to solve problems that depend upon probability, where physical experimentation is impracticable and the creation of a mathematical formula impossible. In other words, it is method of Simulation by the sampling technique. First of all, the probability distribution of the variable under consideration is determined; then a set of random numbers is used to generate a set of values that have the same distributional characteristics as the actual experience it is devised to simulate. Simulation Simulation is a quantitative procedure which describes a process by developing a model of that process and then conducting a series of organised trial and error experiments to predict the behaviour of the process over time. Steps in the Simulation Process Steps in Simulation Process- (i) Define the problem or system you intend to simulate. (ii) Formulate the model you intend to use. (iii) Test the model; compare its behaviour with the behaviour of the actual problem environment. (iv) Identify and collect the data needed to test the model. (v) Run the simulation. (vi) Analyze the results of the simulation and, if desired, change the solution you are evaluating. (vii) Rerun the simulation to test the new solution. (viii) Validate the simulation, that is, increase the chances that any inferences you draw about the real situation from running the simulation will be valid. Steps in Monte Carlo Simulation The steps involved in carrying out Monte Carlo Simulation are: (i) Select the measure of effectiveness of the problem. (ii) Identify the variables which influence the measure of effectiveness significantly.
2 Simulation 15.2 (iii) Determine the proper cumulative probability distribution of each variable selected under step (ii). Plot these, with the probability on the vertical axis and the values of variables on horizontal axis. (iv) Get a set of random numbers. (v) Consider each random number as a decimal value of the cumulative probability distribution. With the decimal, enter the cumulative distribution plot from the vertical axis. Project this point horizontally, until it intersects cumulative probability distribution curve. Then project the point of intersection down into the vertical axis. (vi) Record the value (or values if several variables are being simulated) generated in step (v) into the formula derived from the chosen measure of effectiveness. Solve and record the value. This value is the measure of effectiveness for that simulated value. (vii) Repeat steps (v) and (vi) until sample is large enough for the satisfaction of the decision maker.
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4 Simulation 15.4 Question-1 (i) What is simulation? (ii) What are the steps in simulation? Solution: (i) Simulation is a quantitative procedure which describes a process by developing a model of that process and then conducting a series of organized trial and error experiments to product the behaviour of the process over time. (ii) Steps in the simulation process: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Define the problem and system you intend to simulate. Formulate the model you intend to use. Test the model, compare with behaviour of the actual problem environment. Identify and collect data to test the model. Run the simulation. Analyse the results of the simulation and, if desired, change the solution you are evaluating. Rerun the simulation to tests the new solution. Validate the simulation i.e., increase the chances of valid inferences. Question-2 How would you use the Monte Carlo Simulation method in inventory control? Solution: Steps involved in carrying out Monte Carlo simulation are: (i) Define the problem and select the measure of effectiveness of the problem that might be inventory shortages per period. (ii) (iii) Identify the variables which influence the measure of effectiveness significantly for example, number of units in inventory. Determine the proper cumulative probability distribution of each variable selected with the probability on vertical axis and the values of variables on horizontal axis.
5 15.5 Advanced Management Accounting (iv) (v) (vi) Get a set of random numbers. Consider each random number as a decimal value of the cumulative probability distribution with the decimal enter the cumulative distribution plot from the vertical axis. Project this point horizontally, until it intersects cumulative probability distribution curve. Then project the point of intersection down into the vertical axis. Then record the value generated into the formula derived from the chosen measure of effectiveness. Solve and record the value. This value is the measure of effectiveness for that simulated value. Repeat above steps until sample is large enough for the satisfaction of the decision maker. Question-3 State major reasons for using simulation technique to solve a problem and also describe basic steps in a general simulation process. Solution: Reasons: (i) It is not possible to develop a mathematical model and solutions with out some basic assumptions. (ii) It may be too costly to actually observe a system. (iii) Sufficient time may not be available to allow the system to operate for a very long time. (iv) Actual operation and observation of a real system may be too disruptive. Steps: (i) (ii) (iii) (iv) (v) (vi) (vii) Define the problem or system which we want to simulate. Formulate an appropriate model of the given problem. Ensure that model represents the real situation/ test the model, compare its behaviour with the behaviour of actual problem environment. Identify and collect the data needed to list the model. Run the simulation Analysis the results of the simulation and if desired, change the solution. Return and validate the simulation.
6 Simulation 15.6 Question-4 Write a short note on the advantages of simulation. Solution: Advantages of simulation are enumerated below: (i) Simulation techniques allow experimentation with a model of the system rather than the actual operating system. Sometimes experimenting with the actual system itself could prove to be too costly and, in many cases too disruptive. For example, if you are comparing two ways of providing food service in a hospital, the confusion that would result from operating two different systems long enough to get valid observations might be too great. Similarly, the operation of a large computer centre under a number of different operating alternatives might be too expensive to be feasible. (ii) (iii) (iv) The non-technical manager can comprehend simulation more easily than a complex mathematical model. Simulation does not require simplifications and assumptions to the extent required in analytical solutions. A simulation model is easier to explain to management personnel since it is a description of the behaviour of some system or process. Sometimes there is not sufficient time to allow the actual system to operate extensively. For example, if we were studying long-term trends in world population, we simply could not wait the required number of years to see results. Simulation allows the manager to incorporate time into an analysis. In a computer simulation of business operation the manager can compress the result of several years or periods into a few minutes of running time. Simulation allows a user to analyze these large complex problems for which analytical results are not available. For example, in an inventory problem if the distribution for demand and lead time for an item follow a standard distribution, such as the poison distribution, then a mathematical or analytical solution can be found. However, when mathematically convenient distributions are not applicable to the problem, an analytical analysis of the problem may be impossible. A simulation model is a useful solution procedure for such problems.
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8 Simulation 15.8 Simulation of Manufacturer s / Retailer s Problem - Profitability Question-1 A Car Manufacturing Company manufactures 40 cars per day. The sale of cars depends upon demand which has the following distribution: Sales of Cars Probability The production cost and sale price of each car are ` 4 lakh and ` 5 lakh respectively. Any unsold car is to be disposed off at a loss of ` 2 lakh per car. There is a penalty of ` 1 lakh per car, if the demand is not met. Using the following random numbers, estimate total profit/ loss for the company for the next ten days: 9, 98, 64, 98, 94, 01, 78, 10, 15, 19 If the company decides to produce 39 cars per day, what will be its impact on profitability? Solution: First of all random numbers are allocated in proportion to the probabilities associated with the sales of cars as given below: Sales of Car Probability Cumulative Probability Range for Random Numbers Based on the given random numbers, we simulate the estimated sales and calculate the profit / loss on the basis of specified units of production.
9 15.9 Advanced Management Accounting Day Random Numbers Estimated Sale Profit (Production 40 Cars / Day) (`Lakh) `31 (37Cars `1 3Cars `2) `38 (40Cars `1 2Cars `1) `40 (40Cars `1) `38 (40Cars `1 2Cars `1) `39 (40Cars `1 1Car `1) `31 (37Cars `1 3Cars `2) `40 (40Cars `1) `34 (38Cars `1 2Cars `2) `34 (38Cars `1 2Cars `2) `34 (38Cars `1 2Cars `2) Profit (Production 39 Cars / Day) (`Lakhs) `33 (37Cars `1 2Cars `2) `36 (39Cars `1 3Cars `1) `38 (39Cars `1 1Car `1) `36 (39Cars `1 3Car `1) `37 (39Cars `1 2Car `1) `33 (37Cars `1 2Car `2) `38 (39Cars `1 1Car `1) `36 (38Cars `1 1Car `2) `36 (38Cars `1 1Car `2) `36 (36Cars `1 1Car `2) Total `359 `359 There is no additional profit or loss if the company decides to reduce production to 39 cars per day. Question-2 A Publishing house has bought out a new monthly magazine, which sells at ` 37.5 per copy. The cost of producing it is ` 30 per copy. A Newsstand estimates the sales pattern of the magazine as follows:
10 Simulation Demand Copies Probability 0 < < < < 1, ,200 < 1, ,500 < 1, The newsstand has contracted for 750 copies of the magazine per month from the publisher. The unsold copies are returnable to the publisher who will take them back at cost less ` 4 per copy for handling charges. The newsstand manager wants to simulate of the demand and profitability. The following random number may be used for simulation: 27, 15, 56, 17, 98, 71, 51, 32, 62, 83, 96, 69. You are required to- (i) Allocate random numbers to the demand pattern forecast by the newsstand. (ii) Simulate twelve months sales and calculate the monthly and annual profit/loss. (iii) Calculate the loss on lost sales. Solution: (i) Allocation of Random Numbers Demand Probability Cumulative Probability Allocated RN 0 < < < < 1, ,200 < 1, ,500 < 1,
11 15.11 Advanced Management Accounting (ii) Simulation: Twelve Month s Sales, Monthly and Annual Profit / Loss Month RN Demand Sold Return Profit on Sales ,375 (450Copies `7.5) ,125 (150Copies `7.5) ,625 (750Copies `7.5) ,125 (150Copies `7.5) , ,625 (750Copies `7.5) ,625 (750Copies `7.5) ,625 (750Copies `7.5) ,375 (450Copies `7.5) ,625 (750Copies `7.5) , ,625 (750Copies `7.5) , ,625 (750Copies `7.5) ,625 (iii) Loss on Lost Sale `15,750 (2,100 units ` 7.5). (750Copies `7.5) Loss on Return 1,200 (300Copies `4) 2,400 (600Copies `4) Net Profit Lost Units 2, (1,275) , ,400 (600Copies `4) (1,275) , , , ,200 (300Copies `4) 2, , , , , Total 54,000 7,200 46,800 2,100
12 Simulation Question-3 A retailer deals in a perishable commodity. The daily demand and Supply are variables. The data for the past 500 days show the following demand and supply: Supply Demand Availability (Kg.) No. of Days Demand (Kg.) No. of Days The retailer buys the commodity at ` 20 per kg. and sell it at ` 30 per kg. Any commodity remains at the end of the day, has no saleable value. Moreover, the loss (unearned profit) on any unsatisfied demand is ` 8 per kg. Given the following pair of random numbers, simulate 6 days sales, demand and profit. (31,18); (63, 84); (15, 79 ); (07, 32); (43, 75); (81, 27) The first random number in the pair is for supply and the second random number is for demand viz. in the first pair (31, 18), use 31 to simulate supply and 18 to simulate demand. Solution: The demand and supply patterns yield the following probability distribution. The numbers are allocated in proportion to the probabilities associated with each event. Availability (kg) Prob. Cum Prob. Random Number Allocated Demand (Kg) Prob. Cum Prob. Random Numbers Allocated Let us simulate the supply and demand for the next six days using the given random numbers in order to find the profit if the cost of the commodity is `20 per kg, the selling price is `30 per
13 15.13 Advanced Management Accounting kg, loss on any unsatisfied demand is `8 per kg and unsold commodities at the end of the have no saleable value. Day R No Avail R No Demand Buying Cost Sales Revenue (i) (ii) (i) `20 Min. [(i) or (ii)] `30 Profit Loss * Net Profit (iii) = (ii) (i) (iv) (iii) (iv) , (60) (200) --- (200 ) (*) Due to unsatisfied Demand Total During the simulated period of six days, the net profit of the retailer is `400. Simulation of Cash Flow Problem Question-4 ABC Co-operative Bank receives and disburses different amount of cash in each month. The bank has an opening cash Balance of ` 15 crores in the first month. Pattern of receipts and disbursements from past data is as follows: Monthly Cash Receipts Monthly Cash Disbursements (` in Crores) Probability (` in Crores) Probability Simulate the cash position over a period of 12 months. Required: (i) Calculate probability that the ABC Cooperative Bank will fall short in payments.
14 Simulation (ii) Calculate average monthly shortfall. (iii) If ABC bank can get an overdraft facility of ` 45 crores from other Nationalized banks. What is the probability that they will fall short in monthly payments? Use the following sequence (row-wise) of paired random numbers Solution: Monthly Cash Receipts (`Crores) Monthly Cash Disbursements (`Crores) Cash Probability Cumulative R.N. Cash Probability Cumulat. R.N Opening Receipt Total Payment Closing Months (` in Crores) Random Numbers (` in Crores) (` in Crores) Random Numbers (` in Crores) (` in Crores) (12) 2 (12) (30) 3 (30) (33) 4 (33) (51) 5 (51) (15) (54) 6 (54) (12) (69) 7 (69) (27) (66) 8 (66) (30) (63) 9 (63) (3) 10 (3) (18) 11 (18)
15 15.15 Advanced Management Accounting (i) (ii) (iii) In 12 months, the bank falls Short of Cash in 10 months to meet payment. Thus, Probability of Shortfall is 0.83 (10/12). Total Shortfall of ` 399 Crores over 10 months. Average monthly Shortfall during 10 months is `39.9 Crores. With an Overdraft Facility of `45 Crores, there will be a Shortfall in 5 months (4,5,6,7,8). Therefore, Probability will be 0.42 (5/12). Simulation of Operations of Travelling Agency, Retail Store, Booking Centre and Bank Question-5 A single counter ticket booking centre employs one booking clerk. A passenger on arrival immediately goes to the booking counter for being served if the counter is free. If, on the other hand, the counter is engaged, the passenger will have to wait. The passengers are served on first come first served basis. The time of arrival and the time of service varies from one minute to six minutes. The distribution of arrival and service time is as under: Required: Arrival / Service Time (Minutes) Arrival (Probability) Service (Probability) (i) (ii) Simulate the arrival and service of 10 passengers starting from 9 A.M. by using the following random numbers in pairs respectively for arrival and service. Random numbers (60, 09); (16, 12); (08, 18); (36, 65); (38, 25); (07, 11); (08, 79); (59, 61); (53, 77); (03, 10). Determine the total duration of (1) Idle time of booking clerk and (2) Waiting time of passengers.
16 Simulation Solution: Random Allocation Table: Time * Arrival (Probability) Arrivals Cumulative Probability Random No. Allocated Time * Service (Probability) Service Cumulative (Probability) Random No. Allocated (*) in minutes Simulation of Trails R. No. Arrival* Time Start R. No. Time* Finish Time Waiting Time Clerk Passenger Total 6 6 (*) in minutes
17 15.17 Advanced Management Accounting In the above ten trial, the clerk was idle for 6 minutes and the passengers had to wait for 6 minutes. Question-6 In a small store of readymade garments, there is one clerk at the counter who is to check bills, receive payments and place the packed garments into fancy bags. The arrival of customer at the store is random and service time varies from one minute to six minutes, the frequency distribution for which is given below: Time between Arrivals Frequency Service Time Frequency (minutes) (minutes) The store starts work at 11 a.m. and closes at 12 noon for lunch and the customers are served on the first came first served basis. Using Monte Carlo simulation technique, find average length of waiting line, average waiting time, average service time and total time spent by a customer in system. You are given the following set of random numbers, first twenty for arrivals and last twenty for service: Solution: From the frequency distribution of arrivals and service times, probabilities and cumulative probabilities are first worked out as shown in the following table:
18 Simulation Time Between Arrivals Frequency Probability Cum. Prob. Service Time Frequency Prob. Cum. Prob The random numbers to various intervals have been allotted in the following table: Time Between Arrivals Random Number Probability Random Numbers Allotted Service Time Probability Random Numbers Allotted Time Till Next Arrival Arrival Time A.M. Service Begins A.M. Simulation Work Sheet Random Number Service Time Service Ends A.M. Clerk Waiting Time Customer Waiting Time Length of Waiting Line
19 15.19 Advanced Management Accounting Total Average Queue Length = Number of Customers in Waiting Line Number of Arrivals = Average Waiting Time per customer = 2.8 minutes Average Service Time = minutes 20 Time a Customer Spends in System = 2.8 minutes minutes = 5.5 minutes Question-7 A refreshment centre in a railway station has two counters - (i) self-service (opted by 60 % of the customers) and (ii) attended service (opted by 40 % of the customers). Both counters can serve one person at a time. The arrival rate of customers is given by the following probability distribution:
20 Simulation No. of Arrivals Probability Formulate the associated interval of 2 digit random numbers for generating (i) the type of service and (ii) the arrival rate Solution: Type of Service Probability Cumulative Probability Random No. Interval Self- Service Attended Service Arrival Rate No. of Arrivals Probability Cumulative Probability Random Number Interval Question-8 An international tourist company deals with numerous personal callers each day and prides itself on its level of service. The time to deal with each caller depends on the client's requirements which range from, say, a request for a brochure to booking a round-the-world cruise. If a client has to wait for more than 10 minutes for attention, it is company's policy for the manager to see him personally and to give him a holiday voucher worth ` 15. The company's observations have shown that the time taken to deal with clients and the arrival pattern of their calls follow the following distribution pattern: Time to deal with clients Minutes Probability
21 15.21 Advanced Management Accounting Time between call arrivals Minutes Probability Required: (i) (ii) (iii) Describe how you would simulate the operation of the travel agency based on the use of random number tables; Simulate the arrival and serving of 12 clients and show the number of clients who receive a voucher (use line 1 of the random numbers below to derive the arrival pattern and line 2 for serving times); and Calculate the weekly cost of vouchers; assuming the proportion of clients receiving vouchers derived from (ii) applies throughout a week of 75 operating hours. Random Numbers Line Line Solution: Time to Deal with Clients Time (Minutes) Probability Cumulative Probability Assigned Numbers Time between Arrivals Time (Minutes) Probability Cumulative Probability Assigned Numbers
22 Simulation Simulation Table for Time between Arrivals and Service Time Client Time Between Arrivals Arrival Time Time In Serving Time Time Out Waiting Time Voucher Yes Yes Total Clients in a Week of 75Hours = 433 (75 hours 60 minutes /10.4 # minutes) # Average Time between Arrivals = 10.4 minutes ( ) 2 out of the 12 clients receive `15 voucher. So the Cost will be `1, or `1,083 [(2/12 433) `15]. Taking Cycle Time as 148 minutes, Voucher Cost can be computed as follows: `15 per Client [(75 hours 60 minutes /148 minutes) No. of Cycles 2 Clients per Cycle Time] So, Voucher Cost will be ` Question-9 With a view to improving the quality of customer services, a Bank is interested in making an assessment of the waiting time of its customers coming to one of its branches located in a residential area. This branch has only one teller s counter. The arrival rate of the customers and the service rate of the teller are given below:
23 15.23 Advanced Management Accounting Time between two consecutive arrivals of customers (in minutes) Probability Service time by the teller (in minutes) Probability You are required to simulate 10 arrivals of customers in the system starting 11 AM and show the waiting time of the customers and idle time of the teller. Use the following random numbers taking the first two random numbers digits each for trial and so on: 11, 56, 23, 72, 94, 83, 83, 02, 97, 99, 83, 10, 93, 34, 33, 53, 49, 94, 37 and 97. Solution: Random Numbers Allocation Arrivals Time Between Two Consecutive Arrivals of Customers in minutes Probability Cumulative Probability Random Nos. Allocated
24 Simulation Service Time Arrivals Time by the Teller in minutes Simulation Table S. No R. No Probability Cumulative Probability Random Nos. Allocated Arrival Time in minutes Arrival Time A.M. Service Begins A.M. R. No Service Time in minutes Service Ends A.M. Waiting Time for Customer Time in minutes Total Waiting Time of Customers: 4 minutes Total Idle Time of Teller: 10 minutes Idle Time In mints Total 4 10
25 15.25 Advanced Management Accounting Simulation of Inventory Problems Question-10 A book store wishes to carry systems analysis and design in stock. Demand is probabilistic and replenishment of stock takes 2 days (i.e. if an order is placed in March 1, it will be delivered at the end of the day on March 3). The probabilities of demand are given below: Demand (Daily) Probability Each time an order is placed, the store incurs an ordering cost of ` 10 per order. The store also incurs a carrying cost of ` 0.50 per book per day. The inventory carrying cost is calculated on the basis of stock at the end of each day. The manager of the book-store wishes to compare two options for his inventory decision: A. Order 5 books, when the inventory at the beginning of the day plus orders outstanding is less than 8 books. B. Order 8 books, when the inventory at the beginning of the day plus orders outstanding is less than 8 books. Currently (beginning of the 1 st day) the store has stock of 8 books plus 6 books ordered 2 days ago and expected to arrive next day. Using Monte-Carlo simulation for 10 cycles, recommend which option the manager should choose? The two digits random numbers are given below: Solution: First of all, random numbers are allocated in proportion to the probabilities associated with demand as given below: Demand Probability Cumulative Probability Random Nos Based on the ten random numbers given, we simulate the demand per day in the table given below:
26 Simulation It is given that stock in hand is 8 units and stock on order is 6 units (expected to receive on next day). Let us now consider both the options stated in the question. Option-A Order 5 Books, when the inventory at the beginning of the day plus orders outstanding is less than 8 books: Day Random No. Sales Demand Op. Stock (in hand) Qty. Order Qty. Recd. at End of the Day Total Qty. on Order Closing Stock Now on day 6, there is stock out position since 5 units will be received at the end of the day and demand occurring during the day cannot be met. Hence, it will not be possible to proceed further and we will have to leave the answer at this stage. Option-B Order 8 Books, when the inventory at the beginning of the day plus orders outstanding is less than 8 books: Day Random No. Sales Demand Op. Stock (in hand) Qty. Order Qty. Recd. at End of the Day Total Qty. on Order Closing Stock
27 15.27 Advanced Management Accounting Now on day 6, there is stock out position since 8 units will be received at the end of the day and demand occurring during the day cannot be met. Hence, it is not possible to proceed further and we may leave the answer at this stage. Alternatively If we assume that the demand occurring during the day can be met out of stock received at the end of the day, the solution will be as follows: Option-A Order 5 books when the inventory at the beginning of the day plus orders outstanding is less than 8 books: Day Random No. Sales Demand Op. Stock (in hand) Qty. Order Qty. Recd. at End of the Day Total Qty. on Order Closing Stock Carrying Cost = `19.50 (39 Books `0.50) Ordering Cost = `40.00 (4 Orders `10) Total Cost = `59.50 (` `40.00)
28 Simulation Option-B Order 8 Books, when the inventory at the beginning of the day plus orders outstanding is less than 8 books: Day Random No. Sales Demand Op. Stock (in hand) Qty. Order Qty. Recd. at End of the Day Total Qty. on Order Carrying Cost = `22.50 (45 Books `0.50) Ordering Cost = `20.00 (2 Orders `10) Total Cost = `42.50 (` `20.00) Since Option B has lower cost, Manager should order 8 books. Closing Stock Evaluation of Investment Proposal Question-11 The M.C. Company is evaluating an investment proposal which has uncertainty associated with the three important aspects: the original cost, the useful life, and the annual net cash flows. The three probability distributions for these variables are shown below: Original Cost Useful Life Annual Net Cash Inflows Value Probability Period Probability Value Probability ` 60, year 0.40 ` 10, ` 70, year 0.40 ` 15, ` 90, year 0.20 ` 20, ` 25,
29 15.29 Advanced Management Accounting The firm wants to perform five simulation runs of this project s life. The firm s cost of capital is 15% and the risk-free rate is 6%; for simplicity it is assumed that these two values are known for certain and will remain constant over the life of the project. To simulate the probability distributions of original cost, useful life and annual net cash inflows, use the following sets of random numbers 09, 84, 41, 92, 65; 24, 38, 73, 07, 04; 07, 48, 57, 64, 72 respectively. Determine the NPV and payback period for each of the five simulation runs. Solution: If the numbers 0-99 are allocated in proportion to the probabilities associated with various categories of each of three variables, then the three variables can be sampled using the given random numbers as follows: Original Cost Useful Life Annual Net Cash Inflows Value Prob. Cum Random Period Prob. Cum Random Value Prob. Cum Random Prob. Number Prob. Number Prob. Number Assigned Assigned 60, Years , , Years , , Years , , The five simulation runs are performed and the results are tabulated below:- Runs Original Cost Useful Life Annual Net Cash Inflows Random Number Value Random Number Value Random Number Value , Years 07 10, , Years 48 20, , Years 57 20, , Years 64 20, , Years 72 20,000 Now let us calculate NPV and payback period for run 1 to run 5. The risk-free rate is given to be 6%. Thus, the discounting rate is taken to be 6% assuming that the required rate of return is 6% for the risk-free investment projects of the company.
30 Simulation Run-1 Period Cash Flow (Mi) (1 + r) I Mi (1 + r) I 0 (60,000) (60,000) 1 10, , , , , , , , , ,470 NPV (17,880) NPV equals to ` (17,880); Payback Period will exceed 5 years. Run-2 Period Cash Flow (Mi) (1 + r) I Mi (1 + r) I 0 (70,000) (70,000) 1 20, , , , , , , , , ,940 NPV 14,240 NPV equals to `14,240; Payback Period equals to 3.5 years. Run-3 Period Cash Flow (Mi) (1 + r) I Mi (1 + r) I 0 (70,000) (70,000) 1 20, , , , , , , ,840
31 15.31 Advanced Management Accounting 5 20, , , ,100 NPV 28,340 NPV equals to `28,340; Payback Period equals to 3.5 years. Run-4 Period Cash Flow (Mi) (1 + r) I Mi (1 + r) I 0 (90,000) (90,000) 1 20, , , , , , , , , ,940 NPV (5,760) NPV equals to ` (5,760); Payback Period equals to 4.5 years. Run- 5 Period Cash flow(mi ) (1 +r) I Mi (1 + r) I 0 (70,000) (70,000) 1 20, , , , , , , , , ,940 NPV 14,240 NPV equals to ` 14,240; Payback Period equals to 3.5 years.
32 Simulation Simulation for Defectives Question-12 A company manufactures a component which requires a high degree of precision. Each unit of the component is therefore subjected to a strict quality control test to ascertain whether there is any defect in it. The defects are classified into three categories viz. A, B and C. if defect A occurs in the output, it is scrapped. If defect B or C occurs in the output, it is reworked to rectify the defect. The machine time required to rework defect B component is 30 minutes and that for defect C is 45 minutes. The probabilities are as under: Defect A Defect B Defect C Defect occurring Defect not occurring Using the following random numbers, simulate a study of 10 items of output and determine the number of items with no defects, number of items scrapped due to occurrence of defect A and the total machine time required for rework due to occurrence of defect B or C : Random number for defect A: Random number of defect B: Random number for defect C: Solution: Random Number (R.N.) Allocation Defect A Defect B Defect C Defect Exist or Not R. No. Allocation Defect Exist R. No. Allocation Defect Exist R. No. Allocation Yes Yes Yes No No No 10 99
33 15.33 Advanced Management Accounting Simulation Table Item Defect Defect Defect Whether Defect Items Rework No. A B C Exists? Scrapped (minutes) No No No B No A B B No B & C Total No Defect exists in 5 items. - Defect A exist in 1 item (item no.6), so it is scrapped. - Defect B exists in 4 items and - Defect C exists in 1 item, so they require rework. - Rectification time required on reworking is 165 minutes. Simulation of Miscellaneous Problems Question-13 A car rental agency has collected the following data on the demand for five-seater vehicles over the past 50 days. Daily Demand No. of Days The agency has only 6 cars at present. (i) Use the following 5 random numbers to generate 5 days of demand for the rental agency Random Nos: 15, 48, 71, 56, 90
34 Simulation (ii) What is the average number of cars rented per day for the 5 days? (iii) How many rentals will be lost over the 5 days? Solution: Daily Demand Days Probability Cumulative Probability Random No. Assigned Day Random No. Demand No. of Cars on Rent Rent Lost Total Cars Average no. of Cars Rented are Rental Lost equals to 3 Cars
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