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Chapter 13_Chapter 13Risk and Capital BudgetingDiscussion Qu(3)
Updated:2011-12-19 Category:sweaters

90.2018

140.3042

90

b.

DPP5090–401,600.101607090–20 400.401609090 0 0.20 014090+502,500.307501070

4.Coefficient of variation (LO1) Shack Homebuilders, Limited, is evaluating a new promotional campaign that could increase home sales. Possible outcomes and probabilities of the outcomes are shown below. Compute the coefficient of variation.

Possible OutcomesAdditional Sales in UnitsProbabilitiesIneffective campaign40.20Normal response60.50Extremely effective140.30
      Solution:

Shack Homebuilders, Limited

Coefficient of variation (V) = standard deviation/expected value.

D PDP

40.20 8

60.5030

140.3042

80=

D PP 4080–401,600.20 320 6080–20 400.50 200 14080+603,600.301,0801,600

5.Coefficient of variation (LO1) Sam Sung is evaluating a new advertising program that could increase electronics sales. Possible outcomes and probabilities of the outcomes are shown below. Compute the coefficient of variation.

Possible OutcomesAdditional Sales in UnitsProbabilitiesIneffective campaign 80.20Normal response124.50Extremely effective340.3013-5.Solution:

Sam Sung

Coefficient of variation (V) = standard deviation/expected value.

D P DP

80.20 16

124.50 62

340.30102

180 =

DPP80180–10010,000.202,000124180 –56 3,136.501,568340180+16025,600.307,680 11,248

6.Coefficient of variation (LO1) Possible outcomes for three investment alternatives and their probabilities of occurrence are given below.

Alternative 1

Outcomes Probability

Alternative 2

Outcomes Probability

Alternative 3

Outcomes Probability

Failure 50.2 90.3 80.4Acceptable 80.4160.5200.5Successful120.4200.2400.1

Rank the three alternatives in terms of risk from lowest to highest (compute the coefficient of variation).

13-6.Solution:Alternative 1Alternative 2Alternative 3D × P = DP D × P = PD × P = DP$50 0.2$10 $90 0.3$27 $80 0.4$32 800.4321600.5802000.51001200.4482000.2404000.140= $90= $147= $172

Standard Deviation Alternative 1

DPP$ 50$90$–40$1,600.2$32080 90–10 100.440120 90+30 900.4 360$720
13-6. (Continued)

Alternative 2

$ 90$147$–57$3,249.3$ 974.70160 147 +13 169.5 84.50200 147 +53 2,809.2 561.80$1,621.00

Alternative 3

$ 80$172$–92$ 8,464.4$3,385.60 200 172+28 784.5 392.00 400 172+228 51,984.1 5,198.40$8,976.00

Rank by Coefficient of Variation

Coefficient of variation (V) = standard deviation/expected value

V

Alternative 2

Alternative 1

Alternative 3

7.Coefficient of variation (LO1) Five investment alternatives have the following returns and standard deviations of returns.

AlternativesReturns: Expected ValueStandard

Deviation

A $ 1,200 $ 300B 800 600C 5,000 450D 1,000 430E 60,00013,200

Using the coefficient of variation, rank the five alternatives from the lowest risk to the highest risk.

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