Skip to main content

Expected Value & Sensitivity Analysis:


Both are the very important and valuable techniques for forecasting and budgeting. Expected Value means taking a random value or a value which is taken on the basis of the expectation or on the basis of the probability distribution. In expected value calculation we take care of some factors which help us to extract the desirable value for the analysis. We focus on the Number of decision alternatives which are under the manager control, and then we focus on the state of nature and the possibilities of the results outcomes and at last the payoff which is the combination of the whole alternative possible outcomes. In short words we take all the alternatives and keep them with the future state of nature and multiplying them with the expected probabilities which are already assigned by the manager on the basis of his experience and state of mind. The outcome of the each multiple value adding with the all state of natures and then a resulting value is consider as a Expected value.
For example Mr. Mark Mollar wants to purchase a house to secure his income and invest that in the fixed assets. He have many places options but two options are very interesting and in his purchasing range because the infrastructure of these places is in the planning of State government and the proper rates will be high after the complete infrastructure facilities installation. But there he is in thinking to purchase which area house and where he invests his capital. According to the available data and problem solution he perform the following solution to extract the expected value with keeping in mind all kinds of situations regarding the infrastructure facilities in these areas. Keeping in mind the probabilities of each State of Nature are with the ratio of .1 , .5 and .8
Areas               State of Nature 1        State of Nature 2        State of Nature 3        =      EV                                                No Infrastructure              within a Year      Planned after 1 or many years
West Town Hill area:    .1 x   (15,000)       +  .5 x (35,000)   +          .8 x      (25,000)=         39,000
Lady Martin Town:        .1 x      (18,000)    +  .5 x (39,000)   +          .8 x      (20,000) =         35,700
 So according to this solution the West Town Hill area is best for Mr. Mark Mollar to purchase.
The critics saying as compare to other methods the expected value has many repetitive trials to extract a result. The probability distribution is very though in it. That method is suitable for those who have the ability to take the risk.
There is another method also which is known as Perfect information method to make the decision. That is possible to use where the Nature is perfectly under control and well known to make a decision. The most common and mathematically use process is the Expected Value with perfect information. The solution process is almost is same like the expected value we have alternatives and different state of nature and the probabilities and then we calculate them and subtract the results from the Expected Value without perfect information factor. The nature of the result helps us to make a decision.

            The most usable method for capital budgeting. According to it the structure of the cost is progressively change with the passage of time and here the management is to carefully treat the whole conditions to make a answer. Through Sensitivity Analysis the management can obtain the best results. If the probabilities assigned to the various states of nature the results will be more refined and clear. That also increases the area of analysis in a state of condition for a business team.

Sensitivity Analysis is mostly use for the complex decision and complex data so the mostly business organizations use the sensitivity analysis computer based software’s to extract the results through it. The major use of the sensitivity analysis is in Capital Budgeting where small changes in figures and data can bring big effects in business decisions. That’s the reason that method of budgeting and forecasting is known as Sensitivity Analysis.  

Comments

Post a Comment

Popular posts from this blog

Financial & Non -Financial Benefits from the Membership of Chamber of Commerce & Industry.

We know every business firm , commerce department, trading venture, and industrial unit always needs, Visibility to stand out and get noticed as an active participant in the society. The eventually prefer to avail growth opportunities through the provision of quality training and educational activities and through different events. They require Credibility through their production activities and services provision, which helps them in building a reputation. The holder of this membership can enjoy and avail members of member discounts to improve their purchasing power and all other offers and benefits as offered from time to time. That also helps them to build their communityNetwork and to make them socially powerful and these professional relationship helping them to get a plate forum that advocates on their behalf. This all means all industrialist, businessmen, and corporate identity holder (Only Owners of the Corporates or in some cases their partners and directors)   must ...
3 comments
Read more

ELEMENTS OF ACCOUNTS:

ELEMENTS OF ACCOUNTS:                 Accounting is the art of collecting, separating, analyzing and recording the financial transactions of the business in a certain economic period. There are two different methods or system to record the accounting transactions, one is Double Entry system and the other one is single entry system. Double Entry System is used by corporate accounting business and MNCs . Single Entry System is use by Nonprofit or Charitable Organizations.                 There are three elements of the accounting transactions and every business financial transaction must be fall in one of them. These Elements are Personal Accounts,  Real Accounts and Nominal Accounts. The Further explanation regarding these accounts are as follows: Personal Accounts:        ...
7 comments
Read more

ACCOUNTING CYCLE

Accounting Cycle:                 Accounting is the field of study which tells us about how to collect the economic figures, evaluate and analyze them and  record them  in a very respectable and professional way to present to the business stakeholders and helps them to collect the required information from the pool of business transactions. That is an art and we also knows it with the name of book keeping. As I write in the above paragraph accounting of business financial transactions is an art of collection, evaluation, analyzing, recording and presenting to the business management and stakeholders. That complete process is based on some steps of activates which are commonly known as accounting cycle. That Accounting Cycle is consist of 7 different steps  which are Source Data, Journal, Ledger, Trial Balance, Adjustment, Closing Accountings and Stock Valuation and Preparation of Fina...
4 comments
Read more