CS Professional · Strategic Management and Corporate Finance · Strategic Analysis and Planning
An Indian logistics firm builds three scenarios for fuel prices over five years. Management rates probabilities of 0.25 for Low, 0.50 for Base and 0.25 for High, with expected annual profits of ₹40 crore, ₹60 crore and ₹100 crore respectively. What is the probability-weighted expected annual profit?
The expected annual profit is ₹65 crore. Multiply each scenario's profit by its probability: 0.25×40 is 10, 0.50×60 is 30 and 0.25×100 is 25, totalling 65. Using a simple average gives 66.67, which wrongly ignores the probabilities.
- A₹65 croreCorrect
- B₹60 crore
- C₹66.67 crore
- D₹70 crore
Explanation
Expected profit = 0.25×40 + 0.50×60 + 0.25×100 = 10 + 30 + 25 = ₹65 crore. Check: simple average (40+60+100)/3 = 66.67 ignores the probabilities, and ₹60 crore is just the base case.
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