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All language subtitles for 09 - Solution Calculate the expected value of a business scenario

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Would you like to inspect the original subtitles? These are the user uploaded subtitles that are being translated: 1 00:00:00,000 --> 00:00:05,002 (energetic music) 2 00:00:05,002 --> 00:00:06,003 - [Instructor] In the previous movie, 3 00:00:06,003 --> 00:00:09,000 I described a set of four scenarios, 4 00:00:09,000 --> 00:00:11,008 assigning probabilities and values 5 00:00:11,008 --> 00:00:14,004 of that scenario to each one, 6 00:00:14,004 --> 00:00:18,005 and our goal is to calculate the expected value 7 00:00:18,005 --> 00:00:19,008 of each of the scenarios 8 00:00:19,008 --> 00:00:22,005 and then also for the entire project. 9 00:00:22,005 --> 00:00:26,000 So I'll start in cell D2, 10 00:00:26,000 --> 00:00:28,000 and the expected value 11 00:00:28,000 --> 00:00:31,009 of a particular scenario is the probability multiplied 12 00:00:31,009 --> 00:00:33,000 by the value. 13 00:00:33,000 --> 00:00:35,001 So, in D2 I'll type equal, 14 00:00:35,001 --> 00:00:40,003 and I have B2 times C2 and Enter. 15 00:00:40,003 --> 00:00:45,008 So we have 18% of 30,000, which is $5,400, 16 00:00:45,008 --> 00:00:49,003 and now I can copy that formula down 17 00:00:49,003 --> 00:00:53,003 so that I have the same calculation for the other scenarios. 18 00:00:53,003 --> 00:00:55,002 So with cell D2 selected, 19 00:00:55,002 --> 00:00:58,006 I will drag the fill handle down, 20 00:00:58,006 --> 00:01:00,007 cover the other cells, 21 00:01:00,007 --> 00:01:05,004 and I can see that I have 5%, or 1/20th of 60,000 is 3000, 22 00:01:05,004 --> 00:01:08,002 one third of 5,000 is 1,650 23 00:01:08,002 --> 00:01:13,001 and 44% of 10,000 is 4,400. 24 00:01:13,001 --> 00:01:15,005 Note that the values for scenarios three 25 00:01:15,005 --> 00:01:16,009 and four are negative. 26 00:01:16,009 --> 00:01:19,005 That's why they're in parentheses. 27 00:01:19,005 --> 00:01:22,001 To find the total expected value, 28 00:01:22,001 --> 00:01:24,003 we want to add up all of the expected values 29 00:01:24,003 --> 00:01:26,003 from the individual scenarios. 30 00:01:26,003 --> 00:01:30,008 So, I'll click cell D6, press Alt equal, 31 00:01:30,008 --> 00:01:32,006 which creates an AutoSum formula, 32 00:01:32,006 --> 00:01:35,007 D2 to D5, looks good, Enter, 33 00:01:35,007 --> 00:01:41,000 and I get an expected value of 2,350, 34 00:01:41,000 --> 00:01:42,005 and we can also do a crosscheck 35 00:01:42,005 --> 00:01:45,000 to make sure our probabilities add up to a hundred 36 00:01:45,000 --> 00:01:48,008 by also creating an AutoSum formula in B6. 37 00:01:48,008 --> 00:01:51,001 So, Alt equal and Enter, 38 00:01:51,001 --> 00:01:52,007 and they do add up to a hundred percent, 39 00:01:52,007 --> 00:01:54,007 so everything looks good. 40 00:01:54,007 --> 00:01:58,001 So we have an expected value of $2,350. 41 00:01:58,001 --> 00:01:59,009 It is a positive value, 42 00:01:59,009 --> 00:02:02,006 but the question is whether we would want to go forward 43 00:02:02,006 --> 00:02:05,007 with it given the high probability of failure. 44 00:02:05,007 --> 00:02:08,000 If we look at the probabilities 45 00:02:08,000 --> 00:02:10,002 for scenarios three and four, we see 46 00:02:10,002 --> 00:02:14,005 that 77% of the time, we are going to lose money. 47 00:02:14,005 --> 00:02:16,007 However, if we assume 48 00:02:16,007 --> 00:02:19,007 that our initial investment is $10,000, 49 00:02:19,007 --> 00:02:25,004 then 2,350 represents about a 23.5% return. 50 00:02:25,004 --> 00:02:28,002 So, based on your tolerance for risk, 51 00:02:28,002 --> 00:02:30,003 you might want to go ahead with this project. 52 00:02:30,003 --> 00:02:32,001 However, if you have other projects 53 00:02:32,001 --> 00:02:35,003 that might return a lower expected value, 54 00:02:35,003 --> 00:02:37,007 but have higher probability of success, 55 00:02:37,007 --> 00:02:39,007 then you might choose to go in that direction. 56 00:02:39,007 --> 00:02:42,000 And that's what makes business so challenging. 4163