Expected Value of Year 1 Cash Flows(Proposal B CF1 P (cF1)() $-1,000 05 $-50 2.000 25 500 5.000 40 2,000 8.000 25 2.000 11,000 05 550 ∑=1.00cF1=$5,000 14-11
14-11 Expected Value of Year 1 Cash Flows (Proposal B) CF1 P1 (CF1 )(P1 ) $ -1,000 .05 $ -50 2,000 .25 500 5,000 .40 2,000 8,000 .25 2,000 11,000 .05 550 =1.00 CF1=$5,000
Variance of year 1 Cash Flows(Proposal B) (cF() (CF1-CF1)2(P) $-50(-1,0005,00)2(05) 500 (2,000-5,000)2(25) 2,000(5,000-5,0002(40 2000(8,000-5,0002(25) 550 (11,000-5000)2(05) 5000 14-12
14-12 (CF1 )(P1 ) (CF1 - CF1 ) 2 (P1 ) $ -50 ( -1,000 - 5,000) 2 (.05) 500 ( 2,000 - 5,000) 2 (.25) 2,000 ( 5,000 - 5,000) 2 (.40) 2,000 ( 8,000 - 5,000) 2 (.25) 550 (11,000 - 5,000) 2 (.05) $5,000 Variance of Year 1 Cash Flows (Proposal B)
Variance of year 1 Cash Flows(Proposal B) (cF() (CF,-CF,2() $-50 1,800,000 500 2250,000 2,000 0 2,000 2250,000 550 1,800,000 5000 8,100,000 14-13
14-13 Variance of Year 1 Cash Flows (Proposal B) (CF1 )(P1 ) (CF1 - CF1 ) 2 (P1 ) $ -50 1,800,000 500 2,250,000 2,000 0 2,000 2,250,000 550 1,800,000 $5,000 8,100,000
Summary of Proposal B The standard deviation E sQRT(8,100,000)=$2,846 The expected cash flow $5,000 The standard deviation of Proposal B Proposal A ($2,846<$3,795) 14-14
14-14 Summary of Proposal B The standard deviation of Proposal B < Proposal A. ( $2,846 < $3,795 ) The standard deviation = SQRT (8,100,000) = $2,846 The expected cash flow = $5,000