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sir,
what is joint probability and how do we calculate them. can you please help me with an example or something because i cant find any exampleSuppose the probability of receiving $1,000 this year is 0.2, and the probability of receiving $2,000 next year is 0.5.
Then the probability of getting both receipts (i.e. receiving a total of $3,000 over the two years) is 0.2 x 0.5 = 0.1
(The logic is that you would only get $1,000 in the first year 20 times out of a 100. Of those 20 times, you would only then get $2,000 in the second year as well on only 50% of the times. Therefore only 10 times out of a 100 would you get both, which is 10% or 0.1 probability,)
Copper Co is concerned about the risk associated with a proposed investment and is looking for ways to incorporate risk
into its investment appraisal process. The company has heard that probability analysis may be useful in this respect
and so the following information relating to the proposed investment has been prepared:
Year 1 Year 2
Cash flow Probability Cash flow Probability
($) ($)
1,000,000 0·1 2,000,000 0·3
2,000,000 0·5 3,000,000 0·6
3,000,000 0·4 5,000,000 0·1
However, the company is not sure how to interpret the results of an investment appraisal based on probability analysis.
The proposed investment will cost $3·5m, payable in full at the start of the first year of operation. Copper Co uses a
discount rate of 12% in investment appraisal.
Required:
(a) Using a joint probability table:
(i) Calculate the mean (expected) NPV of the proposed investment; (8 marks)
(ii) Calculate the probability of the investment having a negative NPV; (1 mark)
(iii) Calculate the NPV of the most likely outcome; (1 mark)
(iv) Comment on the financial acceptability of the proposed investmentsir this a very recent question please help me. thank you
leave it sir i got it anyways thank you . sir can you tell in overtrading will the receivable , payable and inventory increase or decrease???
I am pleased you have got it!! (This sort of question has only been asked twice in the last 20 years, and so I think it will be a few years before it is asked again 🙂 )
There are no ‘rules’ with regard to what happens when overtrading. However all three are likely to increase, for the reasons I explain in my free lectures on working capital management (and I am obviously not going to type out all of my free lectures here 🙂 )
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