Consider the probability distribution of the first year cash flows for the DEF Project: Project Cash...
- Consider the probability distribution of the first year cash flows for the DEF Project:
|
Project Cash Flow |
Probability |
|
$1,000 |
20% |
|
$2,000 |
60% |
|
$3,000 |
20% |
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- Calculate the range of possible cash flows
- Calculate the expected cash flow
- Calculate the standard deviation of the possible cash flows
- Calculate the coefficient of variation of the possible cash flows
Homework Answers
a. Range of possible cash flow is calculated using difference between minimum and maximum value of project cash flow .
Here minimum cash flow = $1000 and maximum cash flow = $ 3000 . Thus Range = $ 3000 -$1000 = $2000
b. Expected cash flow =
= $1000* 20% + $2000 * 60% + $3000 * 20% =
$ 2000
c. Standard Deviation = 
= 
= 632.455
Where 
= expected project
cash flow x= project cash flow P(x) = probability of respective
project cash flow
d. Coefficient of variation = standard
deviation 
/ mean
() = 632.455 / 2000
= 0.3162
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Consider the probability distribution of the first year cash
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