ExpertMedium2 marksShort Answer
ACCA · Question 09 · B. Data analysis and statistical techniques
A renewable energy company is evaluating the potential financial return of a new solar farm project. The analysts have modeled three possible scenarios for the first year's net cash flow:
- Optimistic scenario: $100,000 (Probability: 0.20)
- Most likely scenario: $60,000 (Probability: 0.50)
- Pessimistic scenario: -$20,000 (Probability: 0.30)
Calculate the Expected Value (EV) of the first year's net cash flow.
(Enter the numeric value only, without commas or currency symbols)
A renewable energy company is evaluating the potential financial return of a new solar farm project. The analysts have modeled three possible scenarios for the first year's net cash flow:
- Optimistic scenario: $100,000 (Probability: 0.20)
- Most likely scenario: $60,000 (Probability: 0.50)
- Pessimistic scenario: -$20,000 (Probability: 0.30)
Calculate the Expected Value (EV) of the first year's net cash flow.
(Enter the numeric value only, without commas or currency symbols)
How to approach this question
Multiply each outcome by its probability and sum the results. Be careful with the negative sign on the pessimistic scenario.
Full Answer
Expected Value = (0.20 * $100,000) + (0.50 * $60,000) + (0.30 * -$20,000)
EV = $20,000 + $30,000 - $6,000 = $44,000.
Common mistakes
Adding the pessimistic scenario instead of subtracting it (resulting in $56,000).
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