XYZ has an estimated probability distribution of its annual net cash flows as fo

Question

XYZ has an estimated probability distribution of its annual net cash flows as follows:

Probability                                          Cash Flow

  .05                                                        $   500

  .10                                                            1000

  .35                                                            1500

  .25                                                            2000

  .15                                                            2300

  .10                                                            3000

1. Compute expected annual cash flow.

2. Compute the variation of the annual cash flow.

3. Compute the standard deviation of annual cash flows.

****MAKE SURE TO USE 5 DECIMALS**

Explanation / Answer

1.Expected cash flows=Respective probabilities*Respective cash flows

=(0.05*500)+(0.1*1000)+(0.35*1500)+(0.25*2000)+(0.15*2300)+(0.1*3000)

=1795

Sd=[Total Probability*(Cash flow-Expected cash flow]/Total probabilities]^(1/2)

=609.49(Approx)

Variance=SD^2

=371475

Probability Cash flow Probability*(Cash flow-Expected cash flow)^2 0.05 500 0.05*(500-1795)^2=83851.25 0.1 1000 0.1*(1000-1795)^2=63202.5 0.35 1500 0.35*(1500-1795)^2=30458.75 0.25 2000 0.25*(2000-1795)^2=10506.25 0.15 2300 0.15*(2300-1795)^2=38253.75 0,1 3000 0.1*(3000-1795)^2=145202.5 Total=371475

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