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Hi Sir,
Hope you are doing well!
Ques – It is now felt that the final scrap value of the machines depends on two factors:
whether or not a new supplier enters the market (which would reduce the likely
scrap value) and the strength of the dollar against other currencies (since sales of
used machines will be made abroad and invoiced in the foreign currency). Adverse
effects will each reduce the scrap value by 10% of the figure used in the investment
appraisal. The relevant probabilities are as follows.
New supplier Probability Strong $ Probability
Yes 0.4 Yes 0.3
No 0.6 No 0.7What is now the expected value of the scrap proceeds?
SIr , I need to understand the workings behind it ?
You have not said what the final scrap value was initially expect to be, and neither have you written which currency they work in, so I cannot calculate the expected scrap value.
However you need to list the four possible outcomes, and for each of them the scrap value and the probability.
The probability of new supplier and strong $ is 0.4 x 0.3 = 0.12
The probability of new supplier and not strong $ is 0.4 x 0.7 = 0.28
The probability of not new supplier and strong $ is 0.6 x 0.3 = 0.18
The probability of not new supplier and not strong $ is 0.6 x 0.7 = 0.42For each possibility multiply the outcome by the probability, and then add them up to get the expected value (as you will remember from Paper PM).
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