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8/6/2019 Max Assignment
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FINANCE & COSTING ASSIGNMENT
Name: Max William DCosta
Roll No.: 4
Course: PGDHR 09-
11Trimester 1
Topic: Risk Evaluation
Problem
Details of two Projects are given below:
Project A Project B
Cash Flow Probability Cash Flow Probability1000 0.2 1200 0.2800 0.6 800 0.6600 0.2 400 0.2
Which project is more risky?
Solution
A) Let us calculate the Expected Cash Flow for Project A
Expected Cash Flow for Project A = (1000 x 0.2) + (800 x 0.6) + (600 x 0.2)
= 800
B) Let us calculate the Expected Cash Flow for Project A
Expected Cash Flow for Project B = (1200 x 0.2) + (800 x 0.6) + (400 x 0.2)= 800
Here we can see that 800 is the mean.
C) Let us calculate the Standard Deviation from the Mean for Project A
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Following are the steps for the calculation of Standard Deviation from the mean for
Project A.
Step 1: Calculate the Mean
The mean has already been calculated above which is 800
Step 2: Calculation of Deviation from Mean
1000 800 = 200
800 800 = 0
600 800 = -200
Step 3: Square each Deviation & Multiply by the corresponding Probabilities
(200)2 x 0.2 = 8000
(0)2 x 0.6 = 0
(-200)
2
x 0.2 = 8000
Step 4: Summation to find the Total Deviation (i.e.) Variance
= (8000 + 0 + 8000)
= 16000
Step 5: Square Root of the Total Deviation (i.e. Variance) to get the Standard
Deviation
= 16000= 126.79
D) Let us calculate the Standard Deviation from the Mean for Project B
Following are the steps for the calculation of Standard Deviation from the mean for
Project B.
Step 1: Calculate the Mean
The mean has already been calculated above which is 800
Step 2: Calculation of Deviation from Mean
1200 800 = 400
800 800 = 0
400 800 = -400
Step 3: Square each Deviation & Multiply by the corresponding Probabilities
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(400)2 x 0.2 = 32000
(0)2 x 0.6 = 0
(-400)2 x 0.2 = 32000
Step 4: Summation to find the Total Deviation (i.e.) Variance
= (32000 + 0 + 32000)
= 64000
Step 5: Square Root of the Total Deviation (i.e. Variance) to get the Standard
Deviation
= 64000= 252.98
Since the deviation (skewness) of Project B is more than that of Project A
Project B is more Risky, and hence it may rejected.
E) Also, which Project should I go for?
Project A
Variation of Project A is 126.49
Co-efficient of Variation = Standard
Deviation ()Mean
= 126.49 800= 0.158
Project B
Variation of Project B is 252.98
Co-efficient of Variation = Standard
Deviation ()Mean
= 252.98 800= 0.316
Since the Co-efficient of Variation of Project A is lower.
We will go in for Project A. Investment is recommended in Project A.
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