Calculate the expected value-standard deviation

Assignment Help Accounting Basics
Reference no: EM13966972

Certainty Equivalent Method. Tex-Mex, Inc., is a rapidly growing chain of Mexican food restaurants. The company has a limited amount of capital for expansion and must carefully weigh available alternatives. Currently, the company is considering opening restaurants in Santa Fe or Albuquerque, New Mexico. Projections for the two potential outlets are as follows:

Annual Profit

City

Outcome

Contribution

Probability

Albuquerque

Failure

$100,000

0.5

 

Success

200,000

0.5

Santa Fe

Failure

$60,000

0.5

 

Success

340,000

0.5

Each restaurant would require a capital expenditure of $700,000, plus land acquisition costs of $500,000 for Albuquerque and $1 million for Santa Fe. The company uses the 10% yield on risk- less U.S. Treasury bills to calculate the risk-free annual opportunity cost of investment capital.

A. Calculate the expected value, standard deviation, and coefficient of variation for each outlet's profit contribution.

B. Calculate the minimum certainty equivalent adjustment factor for each restaurant's cash flows that would justify investment in each outlet.

C. Assuming that the management of Tex-Mex is risk averse and uses the certainty equiva- lent method in decision making, which is the more attractive outlet? Why?

Reference no: EM13966972

Questions Cloud

Develop a plan to become an nurse practitioner : Develop a plan to become an nurse practitioner. First, take time to examine the roles of the advanced practice nurse within the context of the United States healthcare delivery system
Determining the decision trees : Keystone Manufacturing, Inc., is analyzing a new bid to supply the compa- ny with electronic control systems. Alpha Corporation has been supplying the systems, and Keystone is satisfied with its performance. However, a bid has just been received f..
Write an essay on science in our life : Write an Essay on 'Science in our Life' 1000 words atleast.
What is a polymorphonuclear neutrophil : After the contact with foreign antigens, body produces specific antibody. These specific antibodies are readily detectable in serum primary contact with antigen after what?
Calculate the expected value-standard deviation : Each restaurant would require a capital expenditure of $700,000, plus land acquisition costs of $500,000 for Albuquerque and $1 million for Santa Fe. The company uses the 10% yield on risk- less U.S. Treasury bills to calculate the risk-free annua..
Essay on employment issues hiring promotions and termination : Write an essay on Employment Issues: Hiring, Promotions, and Terminations. Describe how managers can address the inherent ethical dimensions of this situation.
Describe the image receptor response curve for cr. : The Physics of Radiology shows the MTF of a screen film for mammography and the MTF of a high-speed screen-film (curves C and D, panel b).  Give two physical reasons why the mammography screen-film has a higher geometric resolution.
Technical journal for your current or planned field of work : Find a technical journal for your current or planned field of work, and write an executive summary of one of the major articles in it. You may use a hard copy or an electronic format of a journal of your choice
Risk-adjusted discount rates : One-Hour Dryclean, Inc., is contemplating replacing an obsolete dry-cleaning machine with one of two innovative pieces of equipment. Alternative 1 requires a current investment outlay of $25,373, whereas alternative 2 requires an outlay of $24,199..

Reviews

Write a Review

 

Accounting Basics Questions & Answers

  Calculate depreciation expense and book value

On January 1, 2009, Boston Company purchased a heavy duty machine having an invoice price of $13,000; Boston paid transportation and installation costs totaling $3,000.

  Effect of transactions on cash flows state the effect cash

effect of transactions on cash flows state the effect cash receipt or payment and amount of each of the following

  The following data in thousands of dollars have been taken

the following data in thousands of dollars have been taken from the accounting records ofnbsplarden corporationnbspfor

  Annnual gift tax exclusion

Vincent's gifts for the year before considering the annual gift tax exclusion total

  Prepare a report of the differential costs and revenues

Renee estimates that the company will save 15 percent of the equipment leases, labor, and other costs. She also expects to save 20 percent on rent and utilities. Prepare a report of the differential costs and revenues if the lawn service is discont..

  Which of the following are reasons to generate a proform a

1. which of the following is the correct sequence of events?aperforma balance sheet cash budget proforma income

  Materials costs of 300000 and conversion costs of 321300

materials costs of 300000 and conversion costs of 321300 were charged to a processing department in the month of

  Roxanne carter corp reported the following for 2014 net

roxanne carter corp. reported the following for 2014 net sales 1200000 cogs 750000 selling and administrative expenses

  Leased heavy machinery from young leasing company the terms

on january 1 2004 digital inc. leased heavy machinery from young leasing company. the terms of the lease require annual

  What is marys basis in the real property

Mary received a liquidating distribution from ABC Corporation as part of the complete liquidation of ABC Corporation. Mary's basis for her ABC Corporation stock was $10,000.

  What is the basis of the machine for cost recovery

On June 1 of the current year, Tab converted a machine to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. ..

  Examples of capital expenditure from industry

Describe a potential capital expenditure project from the industry in which you now work or an industry in which you are interested. What is the project?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd