Mitchell Auto Parts Inc. has estimated the probability distribution of its annua
ID: 2382679 • Letter: M
Question
Mitchell Auto Parts Inc. has estimated the probability distribution of its annual net cash flows as follows:
Probability Cash Flow Probability (in Thousands of Dollars)
0.10 $1,000
0.20 1,500
0.40 2,000
0.20 2,500
0.10 3,000
Compute the expected annual cash flow.
Compute the standard deviation of annual cash flows.
Compute the coefficient of variation of annual cash flows.
Explanation / Answer
Answer:
Probability(A) Cash Flow Probability(in Thousands of Dollars) (B) (A*B) Deviation from Expected value Deviation Squared 0.1 1,000 100 -1,000 1000000 0.2 1,500 300 -500 250000 0.4 2,000 800 0 0 0.2 2,500 500 500 250000 0.1 3,000 300 1,000 1000000 Expected value of Cashflow per annuam 2000 Variance = Sum of all deviation squared/no. of observation = 500000 (*2500000/5) Standard Deviation = Square root of variance = 707.10678 coefficient of variation = divide the standard deviation by the mean and multiply by 100%. So mean = Sum of all cash flow probability/No. of observations = 2000 (*10000/5) So now Coefficient of variation = 35.36% *(707.17/2000)*100%