13.7 Expected net present value Flashcards Preview

Interpreting Financial & Accounting Information > 13.7 Expected net present value > Flashcards

Flashcards in 13.7 Expected net present value Deck (7)
Loading flashcards...
1
Q

What is the methodology for calculating expected net present value (NPV)?

A

1 The probability of an outcome is calculated
2 The expected value of each probable outcome is calculated
3 All expected values are added together, multiplied by their probability, to give an expected value

i.e: Expected value = ΣPX

2
Q

What are the advantages of the expected net present value method of risk assessment?

A
  • provides a clear decision making rule (either the investment is profitable or it is not).
  • easy to calculate
3
Q

What are the disadvantages of the expected net present value method of risk assessment?

A
  • does not account for volatility of an investment (which may only be measured by standard deviation)
  • probabilities are somewhat subjective and difficult to calculate
4
Q

What is standard deviation?

A

S statistical tool that measures the amount of variation or dispersion of a set of data from its mean.

5
Q

How is standard deviation calculated?

A

The square root of variance

6
Q

What is the “coefficient of variation”?

A

The ratio of standard deviation to the mean, measuring the extent of variability in the dispersion of data points in a dataset in relation to the mean of the population.

7
Q

How is “coefficient of variation” calculated?

A

standard deviation / expected net present value

Decks in Interpreting Financial & Accounting Information Class (161):