CMA Final · Strategic Performance Management and Business Valuation · Risk Management
A firm's cash flow from a project has a 0.2 probability of a Rs 50 lakh loss, 0.5 probability of a Rs 20 lakh gain and 0.3 probability of a Rs 60 lakh gain. What is the expected monetary value?
The expected monetary value is Rs 18 lakh. Weighting each outcome by its probability gives a loss of 10 lakh, a gain of 10 lakh and a gain of 18 lakh, which sum to 18 lakh. Treating the loss as positive would wrongly give 38 lakh.
- ARs 18 lakh
- BRs 28 lakhCorrect
- CRs 30 lakh
- DRs 38 lakh
Explanation
EMV = 0.2(-50) + 0.5(20) + 0.3(60) = -10 + 10 + 18 = Rs 18 lakh. Option Rs 28 lakh would arise by ignoring the loss sign incorrectly; check: 10+10+18=38 if loss taken positive. So the correct value is Rs 18 lakh, not the others.
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