Determine expected value of unit sales for the new product


Question 1. Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are given below:

Possible Sales
Market Reaction in Units Probabilities
Low response . . . . . . . . . . . . . 20  .10
Moderate response . . . . . . . . . 40   .30
High response . . . . . . . . . . . . . 55  .40
Very high response . . . . . . . . . 70  .20

a. What is the expected value of unit sales for the new product?

b. What is the standard deviation of unit sales?

Question 2: Possible outcomes for three investment alternatives and their probabilities of occurrence are given below.

Alternative 1 Alternative 2 Alternative 3
Outcomes Probability Outcomes Probability Outcomes Probability

Failure . . . . . . . . 50   .2    90   .3    80  .4
Acceptable . . . . . 80   .4   160  .5   200  .5
Successful . . . . . 120  .4   200  .2   400  .1

Rank the three alternatives in terms of risk (compute the coefficient of variation).

Question 3: Silverado Mining Company is analyzing the purchase of two silver mines. Only one investment will be made. The Alaska mine will cost $2,000,000 and will produce $400,000 per year in years 5 through 15 and $800,000 per year in years 16 through 25. The Montana mine will cost $2,400,000 and will produce $300,000 per year for the next 25 years. The cost of capital is 10 percent.

a. Which investment should be made? (Note: In looking up present value factors for this problem, you need to work with the concept of a deferred annuity for the Alaska mine. The returns in years 5 through 15 actually represent 11 years; the returns in years 16 through 25 represent 10 years.)

b. If the Alaska mine justifies an extra 5 percent premium over the normal cost of capital because of its riskiness and relative uncertainty of flows, does the investment decision change?

Solution Preview :

Prepared by a verified Expert
Finance Basics: Determine expected value of unit sales for the new product
Reference No:- TGS02084037

Now Priced at $25 (50% Discount)

Recommended (95%)

Rated (4.7/5)