Page 222 - BA2 Integrated Workbook STUDENT 2018
P. 222
Chapter 12
Expected value
2.1 Calculation of expected value
Many business situations require a choice between numerous courses of action.
Given that these choices relate to future outcomes, the results will be uncertain.
Clearly, the decision-maker’s experience and judgement are important in making
‘good’ choices in such instances.
One technique which can help judge the financial outcomes of various options is
expected value (EV). An expected value is a long run average.
Expected value is calculated as follows:
EV = ∑PX
Where X is the outcome and P is the probability of the outcome.
A company has recorded the following daily sales over the last 40 days:
Daily sales (units) Number of days
10 5
20 12
30 15
40 8
216
