Question: The CEO is now worried about the state of the economy. The economy is predicted to be booming, growing at a medium pace or in recession in the next two years with the following probabilities and associated profits:

The cash flows for production of the VaVaVoom range are assumed to occur on an end of year basis and you believe that you could earn a 12 per cent return if you use the current VaVaVoom production facilities to increase the production of an alternate model.

(a) You are asked to calculate the Expected present value for the VaVaVoom range.

(b) You must also account for the risk involved and thus calculate a standard deviation measure. Interpret this measure for the CEO.

(c) You believe that the CEO is risk averse. Explain how this concept relates to Expected Present Value.