\"A manufacturing firm is considering a project which has an economic service li

Question

"A manufacturing firm is considering a project which has an economic service life of one year with no salvage value. The initial cost for the project is $1,930. There is a 0.16 probability that the year-end revenue is $2,550 There is a 0.46 probability that the year-end revenue is $3,610. There is a 0.38 probability that the year-end revenue is $4.230. If the firm's MARR is 17%, what is the variance of the project?" Selected Answer: 4188603.52 Correct Answer: 234,854 Answer range + 4,697 (230157.0 - 239551.0) 4,697 (230157.0 - 239551.0)

Explanation / Answer

In this case first we need to check if project is feasible or not so lets calculate Expected return E(R)

E(R) = Sum of (probablities*returns)

E(R) = (0.16*2550) + (0.46*3610) + (0.38*4230) = $3676 > MARR value, hence the project is feasible

(MARR = 1.17*1930 = $2258.1)

The formula for variance is 'sum of (Probability*(Revenue - Expected Revenue)2)

In this case,

Variance = (0.16*(2550 - 3676)2)+ (0.46*(3610 - 3676)2) + (0.38*(4230 - 3676)2) = 231492

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