Page 124 - FM Integrated WorkBook STUDENT 2018-19
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Chapter 6
2.2 Strengths and weaknesses of EVs
Deals with multiple outcomes. Subjective probabilities.
Quantifies probabilities. Answer is only a long-run average.
Relatively simple calculation. Ignores variability of payoffs.
Assists decision making. Risk neutral decision, i.e. ignores
investors’ attitudes to risk.
EVs are appropriate to use when:
there is a reasonable basis for making the forecasts and estimating the
probabilities of different outcomes
the decision is relatively small in relation to the business, so the risk is small in
magnitude
the decision is for a category of decisions that are often made
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