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BRILLIANT’S Analysis of Risk and Uncertainty in Investment Decisions 471
1. Probability Distribution Approach 1. àmo~o{~{bQ>r {S>ñQ´>rã`yeZ EàmoM
The probability distribution may be de- àmo~o{~{bQ>r {S>ñQ´>rã`yeZ H$mo g§^m{dV H¡$e-âbmo Ho$
fined as a set of possible cash flows that may EH$ goQ> Ho$ ê$n _| n[a^m{fV {H$`m Om gH$Vm h¡ Omo {H$gr
occur at a point of time with the probability of nm°BÝQ> Am°\$ Q>mB_ na h_| àmßV hmo gH$Vm h¡ VWm {OgHo$
their occurrence. At the time of estimating cash gmW CgH$s g§^mdZm ^r Ow‹S>r hm|Ÿ& {H$gr ànmoOb go {H$gr
flows resulting from a proposal say, at the end {ZpíMV g_` CXmhaU Ho$ {bE, 1 df© Ho$ níMmV² {_bZo
of year 1, a finance manager may find that he is dmbo g§^m{dV H¡$e-âbmo H$m {ZYm©aU H$aVo g_` EH$
not having a single estimate of cash inflow but \$m`ZoÝg _¡ZoOa H$mo `h _hgyg hmo gH$Vm h¡ {H$ H¡$e-
he has a series of estimation of cash inflows for âbmo H$m H$moB© qgJb EpñQ>_oQ> hmoZo Ho$ ~Om` CgHo$ g_j
that year with the probability of their occur- gå^m{dV H¡$e-âbmo Ho$ EpñQ>_oeZ H$s {garO d CZH$s
rence. àmo~o{~{bQ>r h¡Ÿ&
n EVCF
Symbolically, NPV = t t CO
t 1 1 i
Where, NPP
NPV = Net Present Value of the proposal,
EVCF = Expected Value of Cash Inflows for different years,
i = Risk free discount rate,
CO = Cash Outflow
The expected value of cash inflows may be ZH$Xr àdmh H$s Ano{jV ‘yë¶ H$mo doQ>oO EdaoO Ho$
observed as weighted average because each ê$n ‘| XoIm Om gH$Vm h¡ ³¶m|{H$ à˶oH$ g§^m{dV H¡$e âbmo
possible cash flow is weighted by its H$mo BgH$s àmo~o{~{bQ>r go doQ>oS> {H$¶m OmVm h¡& Bgo Bg AW©
probability. It may also be observed as a long ‘| b§~o g‘¶ VH$ MbZo dmbo EdaoO Ho$ ê$n ‘| ^r XoIm Om
run average in the sense that actual value may gH$Vm h¡ {H$ dmñV{dH$ ‘yë¶, Ano{jV ‘yë¶ go {^ÝZ hmo
be different from expected values. gH$Vm h¡&
Measurement of Risk [añH$ H$s _mn
While calculating expected net present H¡${nQ>b ~OqQ>J _| EŠgnoŠQ>oS> ZoQ> àoOoÝQ> d¡ë`y H$s
value in capital budgeting, risk is obviously JUZm H$aVo g_` [añH$ H$mo Ü`mZ _| aIZm Amdí`H$ h¡Ÿ&
incorporated. For a better insight into the risk [añH$ EZm{b{gg H$m ~ohVa T>§J go AZw_mZ bJmZo Ho$ {bE
analysis, there are two measures of dispersion {S>ñng©Z go g§~§{YV Xmo JUZmE± H$s OmVr h¢ Omo [añH$ Ho$
which indicates the degree of risk. ñVa H$mo Xem©Vr h¡…
(a) Variance or Standard Deviation : Absolute (a) d¡[aEÝg `m ñQ>¡ÊS>S>© S>o{dEeZ… [añH$ H$m Eãgm°ë`yQ>
measure of risk. _mn&
(b) Coefficient of Variation : Relative measure (b) H$mo{\${eEÝQ> Am°\$ d¡[aEeZ: [añH$ H$m [abo{Q>d _mn&
of risk.
2
(a) Variance ( ) or Standard Deviation (): (a) d¡[aEÝg ( ) `m ñQ>¡ÊS>S>© S>o{dEeZ (): d¡[aEÝg
2
Variance or standard deviation (SD) is a `m ñQ>¡ÊS>S>© S>o{dEeZ (SD) [añH$ H$mo _mnZo H$m g~go gm_mÝ`
