SU MBA5004 W5 A2

Satisfactory Essays

Risk Analysis

Managerial Economics MBA 5004 S03
Professor Sabrina Segal
February 26, 2015

Risk analysis is the procedure of characterizing and analyzing the dangers of organizations, people, and government agencies posed as a result of possible common and human-caused adverse occasions.

Project A
Project B
Probability
Cash Flow
Expected Value
Cash Flow
Expected Value
0.2
8100
1620
500
100
0.5
9100
4550
8100
4050
0.3
10500
3150
16500
4950
Expected Value

3320

3100

These expected values represent the cash flow from each project that is at the end of three years after taking into consideration diverse situations.
Project A
Project B
Cash Flows
Difference
Square
Cash Flows
Difference
Square
8100
-133.33
17776.8889
500
-7866.67
6.2E*07
9100
866.67
751116.8889
8100
-266.67
71112.9
10500
2266.67
5137792.889
16500
8133.33
6.6E*07
27700

5906686.667
25100

1.3E*08

Mean
92333.333

Mean
8366.66667

Standard Deviation
2906667/2^
1205.54
Standard Deviation
128106667/2^
8003.33

Coefficient of Variation
0.146

Coefficient of Variation
0.357

This measure shows the degree of variation in the cash flows for each of these projects, also that project B has a higher variation then that of project A. I do believe that project B has a higher risk because of the higher coefficient of variation.
One Cash Flow for each of the next 3 yrs
Project A
Project B
PV of Cash Flows
19983
21127
Initial Investment
-7200
-6800
NPV
12783
14327

I think that this tells the company the present value of the future expected value is greater than the initial investment in both of the projects, after considering the risk implicated in this. the higher risk have been adjusted for higher essential rate of return. for that reason. For a higher positive NPV, the organization ought to prefer project B, as the projects are equally limited. The project that I would recommend to management is project B. The organization could

References: Coefficient of Variation Calculator. (n.d.). Retrieved February 26, 2015, from http://ncalculators.com/statistics/coefficient-of-variance-calculator.htm Net Present Value (NPV) Risk Analysis. (n.d.). Retrieved February 26, 2015, from http://www.rmcapability.com/resources/Capability Guidance Sheet - NPV Risk Modelling.pdf What is risk analysis? - Definition from WhatIs.com. (n.d.). Retrieved February 26, 2015, from http://searchmidmarketsecurity.techtarget.com/definition/risk-analysis

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