INTRODUCTION This paper presents a strategy for teaching Monte Carlo simulation using the case of a capital expansion decision for ArkMed Corporation, a small biomedical device manufacturer located in Houston, Texas. The company is considering investing in a facility that can provide custom products using 3d printing. The facility would serve the custom orthotics and solid implant needs of the medical community of the greater Houston metropolitan area. A simulation of the financial feasibility of the new facility is appropriate since the manufacturing method is unfamiliar to the firm's management, and because the facility would serve a custom ordered product that would be expeditiously provided, within a few hours to a few days, unlike the company's current business. The case provides an opportunity to augment coverage of capital budgeting scenario analysis, and to give students an exercise that requires multi-page referencing in Excel. It also can provide output data that can be summarized into a histogram and frequency distribution chart. This process allows for a visual of the risk that a project could return a negative NPV result. The distribution of NPVs thus provides better information on which to base a capital asset expansion decision than would a discrete NPV value based on averages of sales growth, expense ratios, and tax rate. CASE ASSIGNMENT GIVEN TO STUDENTS Mark Findley finished off the last of the coffee and started a new pot brewing. He was waiting for a message from the Vice President of ArkMed Corporation. A new expansion project had been proposed, and it would be Mark's responsibility to analyze the project. The firm had never invested in a project of this type before, a production facility that would custom print biomedical devices with a 3d printer. The firm had other types of custom manufacture, so Mark figured he could use knowledge from those facilities for cost estimates, but the potential sales could range from disappointing, making little use of the capacity of the plant--to full capacity, where the plant would be used around the clock. Randle Gere, the Vice President, finally called. Mark! I've asked Roberts in operations to coordinate with Atwood in cost accounting to get you operating cost estimates for the new plant. They should be emailing you a spreadsheet soon. What is our timing, Mr. Gere? asked Mark. Do 1 need to stay late today? No, no--not necessary. In fact they are both staying late to provide you with the information. You can just do it tomorrow. Can you get me your output and a report by the end of the day tomorrow? Not a problem, Mark responded. I will get it to you around mid-afternoon. Because of the unfamiliarity of 3d printing technology and the range of possible sales, Mark planned to carry out a simulation for the net present value of the project. The simulation was similar to other NPV analyses he had carried out in the past. He had been with ArkMed for four years and had taken over the Chief' position for the forecasting and analytics office after his boss had retired last year. Mark had already heard from the firm's marketing manager, who had done a breakdown of expected revenues by sales region, based on custom manufacturing sales for other products the firm offered. The facility under consideration was sort of a wild card, though, because business would be based mainly on quick turnaround. Measurements and specifications would be provided by technicians dealing with patients, an order submitted electronically, and then ArkMed would print the custom device, coat it with sterile coatings, package it in sterile packing, and expedite delivery to the hospital or medical office where the procedure was being done. While these devices could be delivered in as little as half a day, it was also possible that quick delivery would not be so critical, and that the firm could schedule production within a three to four day window. …
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