Question

Kyle’s Shoe Stores Inc. is considering opening an additional suburban outlet. An aftertax expected cash flow of $100 per week is anticipated from two stores that are being evaluated. Both stores have positive net present values.

Site A								Site B
Probability				Cash Flows				Probability				Cash Flows
	0.2				50				0.1				20
	0.4				100				0.2				50
	0.2				110				0.4				100
	0.1				150				0.2				150
									0.1				180

a. Compute the coefficient of variation for each site. (Do not round intermediate calculations. Round your answers to 3 decimal places.)

Answer 1

The coefficient of variation for site A is calculated in the below table :

Probability (P)	Cash flow (CF)	CF * P	CF-Expected CF	CF-Expected CF)^2	P * (CF-Expected CF)^2
0.2	50	10	-37	1369	273.8
0.4	100	40	13	169	67.6
0.2	110	22	23	529	105.8
0.1	150	15	63	3969	396.9
	Expected CF =	87		Variance=	844.1
				Std Dev =	29.05339911
				CV=	0.334

Variance = 844.1

Std dev = sqrt (844.1) = 29.0534

Coefficient of Variation = std dev / Expected CF = 0.334

The coefficient of variation for site B is calculated in the below table :

Probability (P)	Cash flow (CF)	CF * P	CF-Expected CF	CF-Expected CF)^2	P * (CF-Expected CF)^2
0.1	20	2	-80	6400	640
0.2	50	10	-50	2500	500
0.4	100	40	0	0	0
0.2	150	30	50	2500	500
0.1	180	18	80	6400	640
	Expected CF =	100		Variance=	2280
				Std Dev =	47.74934555
				CV=	0.477

Variance = 2280

Std dev = sqrt (2280) = 47.7493

Coefficient of Variation = std dev / Expected CF = 0.477