All language subtitles for 03 - Calculate expected value

- [Instructor] When you analyze business scenarios,

you will often want to calculate

the expected value of an overall scenario

with multiple possible outcomes.

As an example, you might think that there would be

three scenarios and you have assigned probabilities

to each of them.

So the first scenario you believe is 30% likely,

the second scenario is 40%, and the third, 30%.

Each of those scenarios will lead to a value, or outcome.

So in scenario one, the value is $5,000, positive 5,000,

for scenario two, it's 10,000,

and for scenario three, that you would have

a loss of $10,000.

You can then calculate the expected value

for each of these scenarios.

To do that, you multiply the probability by the value.

So the expected value for scenario one,

which is 30% likely with a $5,000 value,

is 30% times 5,000 equals 1,500.

You can use the same calculations

to calculate expected value for scenario two of 4,000

and scenario three of minus 3,000.

You then add up all the expected values

to get the overall expected value for a scenario.

So that would be 1,500 plus 4,000

minus 3,000 equals positive $2,500.

So if you're evaluating an investment,

this appears to be a good way to spend your money

unless you can find something better to do.

Now, let's switch over to Excel

so that we can see how to implement this in a worksheet.

I have switched over to my Excel sample file

and that is 06_03_Expected Value.

You can find it in the Chapter Six folder

of the exercise files collection.

Here, I have three scenarios

and I have assigned different probabilities

and values to them.

You can see the probabilities in column B

and the values in column C.

And as noted in the first part of this video,

I want to multiply the probability by the value

of a particular scenario to get its expected value.

So I will select cell D2,

type an equals sign, and I'll multiply B2,

the probability of scenario one,

by the value in C2, which is the value,

and I'll press Enter.

And I see the expected value of scenario one, $50,000,

with a 25% probability is $12,500.

Now I will use the fill handle

to drag the contents of cell D2

so that it covers D3 and D4

and I get those calculations there.

So I have 60% times minus 25,000 equals minus 15,000.

And then for scenario three, 15% times 14,000 is 2,100.

Now to calculate the total expected value

for this business proposition,

I can click in cell B5 and I'll create an AutoSum formula.

So I'll press alt-equal,

I get SUM D2 to D4 and Enter,

and I see that I have an expected value of minus $400.

So that means according to my estimates,

I am likely to lose money on this investment

and I should not go ahead with it.