Calculation of variance and standard deviation of the expected value.
A company is considering between two projects: project 1 and project 2. The estimated cash flows and their probabilities of the two projects are given below.
|
Project 1
|
Project 2
|
|
Cash inflow
|
Probability
|
Cash inflow
|
Probability
|
|
$3,000
|
0.10
|
$2,000
|
0.10
|
|
4,000
|
0.20
|
3,500
|
0.25
|
|
5,000
|
0.40
|
5,000
|
0.30
|
|
6,000
|
0.20
|
6,500
|
0.25
|
|
7,000
|
0.10
|
8,000
|
0.10
|
- Compute the expected value (revenue) from each project.
- Compute the variance and standard deviation of the expected value from each project.
- Compute the coefficient of variation of each project, and determine which project should the company choose.