Expected Value Decision Making
Expected value is a useful technique for addressing risk in business decisions. Expected value is based on the idea that the overall value of an alternative with multiple possible outcomes can be thought of as the average of the random individual outcomes (PW(i), FW(i), or AE(i)) that would occur if that alternative were repeated a large number of times.
To illustrate, suppose that Table 24.1 shows the AE(i), evaluated at the MARR, for the least-favorable, fair, and most-favorable outcomes for the proposed Sierra project at the Western Division of Mountain Systems, Inc. The probabilities of each of those outcomes are also shown.
| Least-Favorable ... |
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