IMCase_20

40 40 20 x expected value 11248 296 180 12408 expected

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Unformatted text preview: = Expected Value 1,124.8 296 (180) 1,240.8 Expected value = \$1,240,800 3. The expanded size restaurant alternative clearly has the higher net present value. (\$1,240,800 vs. \$632,000). 4. Standard Deviation = Σ(D − D ) 2 P D = outcome D = expected value P = probability D 1,050 630 –200 – D 632 632 632 = (D − D) 418 –2 –832 (D − D) 2 174,724 4 692,224 x P .40 .40 .20 = 208,336.0 = 456.4 σ = \$456,400 vs. \$1,415,800 expanded 5. Coefficient of variation (V) = standard deviation expected value standard deviation expected value Standard size restaurant \$456,400 = .722 632,000 Expanded restaurant \$1,415,800 = 1.141 \$1,240,800 (D − D) 2 P 69,889.6 1.6 138,444.8 208,336.0 70 6. Based on the coefficient of variation, the standard size restaurant is much less risky (.722 versus 1.141). Earlier in question two, the preference was clearly for expanded size restaurants. The general principle is that you may not wish to always go with the highest return. Risk must be considered as well. 7. Coefficient of variation 4 standard, 1 expanded 3 standard, 2 expanded 2 standard, 3 expanded 1 standard, 4 expanded \$ 641,630 / 753,760 832,460 / 875,420 1,025,800 / 997,280 1,220,400 / 1,119,040 = = = = .851 .951 1.028 1.091 Based on the answer to question five as well as this question, the lowest-risk alternative is still the five standard restaurants with a coefficient of variation of .722....
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This note was uploaded on 12/21/2012 for the course FINC 309 taught by Professor Bunker during the Spring '12 term at Westminster UT.

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