QUESTION 2 The Paper Cup Company has estimated the following revenue possibiliti
ID: 1132117 • Letter: Q
Question
QUESTION 2 The Paper Cup Company has estimated the following revenue possibilities for the year SalesProbability 0.15 0.20 0.30 29000.20 0.15 1000 1500 2200 3100 a. Find the expected revenue b Find the standard deviation. c. Find the coefficient of variation d. Which of the two measures above (a or b.) is a better measure of risk when comparing projects with different NPV? TTT Paragraph ' Arial 3(1 2pt) , :-.-. T./.4 ' Path p Words Click Save and Submit to save and submit. Click Save All Answers to save all lanswers e All AnswersExplanation / Answer
a.
The formula for expected revenue is the total summation (sales*probability).
Expected Revenue (Mean) = pi xi = (0.15*1000+ 0.20*1500+0.30*2000+0.20*29000.15*3100)
=2155
( Note here pi indicates the probability of sales, & xi indicates the different sales values of the year)
b.
Standard deviation is a measure to express volatility of a quantity to differ from its mean values.
to calculate standard deviation we need to do these following steps as given below
E(xi 2) = pi xi2 = ( 0.15*10002 + 0.20*15002 + 0.30*22002 + 0.20*29002 + 0.15*31002 )
= 5175500
(Note here pi indicates the probability of sales, & xi indicates the square of the different sales values of the year)
Variance of sales revenue = E(xi 2) - Mean2 = 5175500 - 21552 = 531475
Therefore, Standard deviation = Square root of (Variance of sales revenue) = 531475
= 729.02(approx) .
c.
Coefficient of Variation is a standardized measure of dispersion of a probability distribution.
Coefficient of Variation = 100* (Standard deviation / Mean)
= 100* (729.02/2155) = 33.829 (approx)
d. In this case the standard deviation is a better measure of risk when comparing projects with different NPV. The reason behind this being, standard deviation being a measure of volatility indicates the variations in the NPV that may take place in due course of time. The more the standard deviation the more is the deviation from the average values.