Financial Management

Posted: October 17th, 2013

Financial Management

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Financial Management

Probability of making losses of $300,000-10%

Probability of not making losses of $300,000- 90%

Normal economic conditions

Likelihood of occurrence = 45% -$50,000

Unlikelihood of occurrence=55%-?

Hence, the probability of the occurrence of normal conditions to earn $50,000 simultaneously and does not make a loss of $300,000.

P (A and B) = P (A)*P (B) (Brigham, 1995)

P (A) = 0.45 P (B) = 0.9

P (A*B) = 0.45*0.9=0.405 or 405/1000. This shows that the business has a likelihood of making a profit of $50,000 while not incurring a loss of $300,000 standing at 405/1000, which is below the average threshold or a healthy probability (Brigham, 1995).

Based on the likelihood of having a normal condition standing at 45%, while the probability of making a loss at 10%

P (A) P (B) = P (A and B)

P= (0.45*0.1) = 0.045. This translates to a probability of occurrence of making a loss while not under normal conditions at 45/1000. This is however not favorable because it doe guarantee the presence of normal conditions.

Mini-recession

Likelihood of occurrence=25% while making $20,000 gains

Unlikelihood of occurrence= 75 % –

•The probability of occurrence coupled with making a loss of $300,000.

P (A) =25/100P (B) =10/100

P (0.25*0.1) =0.025 or 25/1000. This is not a healthy probability because of the ratio (Ross, 2008).

•The probability of non-occurrence while not making a loss of $ 300,000.

P (A) = 75/100P (B) = 90% or90/100

P (A)*P (B) = (75/100*90/100)

(0.75*0.9) =0.675. This shows a likelihood of occurrence.

Severe Recession

•Likelihood of occurrence= 20% while not making a loss of $ 300,000

P (A) = 0.2P (B) =0.9

P (A and B)

P (A)*P (B) =P (0.2*0.9) = 0.18. This is an unhealthy ratio indicating a low chance of simultaneous occurrence of such a situation

•Unlikelihood of occurrence= 80% while making a loss of $300,000

P (A) =0.8P (B) =0.1

P (A and B)

P (A)*P (B)

P (0.8*0.1) =0.08 or 8/100. This proves as a low chance of occurrence of such an event simultaneously.

The three events, severe recession(S), normal conditions (N), mini recession (M) can be evaluated under the normal conditions. The ratios show that the likelihood of occurrence of the events lies on a negative scale. Hence, it would be paramount for the organization to evaluate more data. As for the data provided, the investment would result impossibility of making losses and in inadequate profits.

References

Brigham, E. F. (1995). Financial management: Theory and practice. Chicago: Dryden Press

Ross, S. A. (2008). Modern financial management. Boston: McGraw-Hill/Irwin.