Mangoes cost 120Rs. (per dozen). Of our purchase done in one single lot, some would go bad and be non-saleable. If weather is unsuitable (5% probability) almost 50% go bad. Most probably (90%probability) around 10% of the quantity will go bad. Otherwise, only if we are very lucky (balance 5%), just 1% will go bad. Then, as we sell them over the three month season, in the first month, they will sell most probably (80% chance) at a price of 200Rs. But depending on unexpected fierce competition, it could just be Rs.150. In the second month, the market stabilizes (90% chance) to a price of Rs.160, with excessive competition possibly driving it to Rs. 130. What is the “risk” of the decision to buy 100 dozen for sale?
A manager of a factory making product B has to decide to invest in development for a new product - product A or product C. She cannot do both due to budget constraints. Product A is estimated to require two million dollars of R&D investment, but only has a 50% chance of the research being successful and a product being obtained. It will have a 30% chance of selling $5M profit, a 40% chance of selling $10M profit, and a 30% chance of no sales. Product C, on the other hand, will also cost $2M in R&D but has an 80% chance of selling $5M profit and a 20% chance of no sales. $1M is the manufacturing cost for either product.
Drivetek Inc. is evaluating a tender for a fee of $250,000 offered for the best proposal for developing the new storage device. Management estimates a cost of $50,000 to prepare a proposal with a fifty-fifty chance of winning the contract. However, DriveTek's engineers have two alternative approaches for building the product. The first approach is a mechanical method with a cost of $120,000. A second approach involves electronic components and will cost only $50,000 to develop a model, but with only a 50 percent chance of satisfactory results.
There are two major decisions in the DriveTek problem. First, the company must decide whether or not to prepare a proposal. Second, if it prepares a proposal and is awarded the contract, it must decide which of the two approaches to try to satisfy the contract.
The degree to which a project relies on fixed costs
Degree of operating leverage = % change in OCF relative to % change in quantity sold
DOL = 1 + (FC/OCF)
FC=Fixed cost, OCF=Operational Cash Flow
Eg. If OCF is Rs.30,000 for 14000 units and FC=Rs. 40,000, DOL = 1 + (40,000/30,000) =2.333. Thus a 1% increase in units sold would generate a 2.33% increase in OCF in the base case range. Vice versa, a 1% decrease in sales = 2.33% decrease in OCF.
E(R i ) is the expected return on the capital asset
R f is the risk-free rate of interest
As the arithmetic average of historical risk free rates of return and not the current risk free rate of return
R m is the expected return on the market portfolio
β im , “ beta coefficient” is the sensitivity of the asset returns to market returns (R market – R riskfree ) is sometimes known as the market premium or risk premium (the difference between the expected market rate of return and the risk-free rate of return)
I: (getting angry) you call Mr. Iyer a horse? If you say that again, I will cut your tongue...! Wife: Don't just blabber something, go out and sit quietly...
I take out the bottle from the potatoes Go in the black cupboard and enjoy a peg Wash the sink and keep it over the rack
Wife is giving a smile Shivaji Maharaj is still cooking But still no one is aware of what I did Becoz I never take a risk I: (laughing) So Iyer is marrying a horse!! Wife: Hey go and sprinkle some water on your face... I again go to the kitchen, and quietly sit on the rack Stove is also on the rack.
There is a small noise of bottles from the room outside I peep and see that wife is enjoying a peg in the sink But none of the horses are aware of what I did
Becoz Shivaji Maharaj never takes a risk
Iyer is still cooking. And I am looking at my wife from the photo and laughing…