Expected value – Knowsia

PSAF – L2 – Q9.4 – Provisions and Contingent Liabilities

Account for contract cancellation, court ruling, and revised contract costs under IPSAS 19, including provisions and disclosures.

Question

Under IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets, the authority needs to account for the cancellation of contracts, the legal case, the court’s decision, and the potential revision of the contract amount.

Required:

Determine whether provisions should be made for the court award and contract revision, calculate the expected value of the revised contract amount, and outline the disclosures required under IPSAS 19.

Answer

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Tags: Contingent Liabilities, Contract Adjustments, Court Ruling, Disclosures, Expected value, Financial Reporting, IPSAS 19, Legal Obligations, Provisions, Public Sector
Level: Level 2

Topic: International Public Sector Accounting Standards

FM – L2 – Q70 – DCF: Risk and uncertainty

Calculate the expected NPV of a project with uncertain cash inflows affected by multiple probabilistic factors, using a 10% cost of capital.

Question

A company is considering whether or not to invest in a project where the investment would be GH¢5,250,000. The project would have a five-year life, and estimated annual cash flows are as follows:

Year	Cash inflows	Cash outflows
	GH¢	GH¢
1	3,000,000	1,500,000
2	4,000,000	1,800,000
3	5,000,000	2,400,000
4	4,000,000	1,700,000
5	3,000,000	1,000,000

The cost of capital is 10%.
The estimates of cash outflows are considered fairly reliable. However, the estimates of cash inflows are much more uncertain. Several factors could make the annual cash flows higher or lower than expected.
Factor 1: There is a 20% probability that government measures to control the industry will reduce annual cash inflows by 20%.
Factor 2: There is a 30% probability that another competitor will also enter the market: this would reduce the estimated cash inflows by 10%.
Factor 3: There is a 40% probability that demand will be stronger than expected. The company would not be able to supply more products to the market, but it would be able to sell at higher prices and cash inflows would be 5% higher than estimated.
Required
Calculate the expected net present value of the project.

Answer

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Tags: Cash Flows, Discounted cash flow, Expected value, investment appraisal, Net Present Value, Probability Analysis, Risk Assessment
Level: Level 2

Topic: DCF: Risk and uncertainty

MA – L2 – Q51 – Decision Making Techniques

Determine the optimal plant hire contract for Terra Works Ltd using expected value based on sales probabilities.

Question

Terra Works Limited is a company that is engaged in site clearance and site preparation work. Information about its operations is as follows:
(1) It is Terra Works Limited’s policy to hire all the plant and machinery it needs rather than to purchase its own plant and machinery.
(2) Terra Works Limited will enter into an advance hire agreement contract for the coming year at one of three levels – high, medium, or low – which correspond to the requirements of a high, medium, or low level of orders obtained.
(3) The level of orders obtained will not be known when the advance hire agreement contract is entered into. Probabilities have been estimated by management as to the likelihood of the orders being at a high, medium, or low level.
(4) Where the advance hire agreement entered into is lower than that required for the level of orders actually obtained, a premium rate must be paid to obtain the additional plant and machinery required.
(5) No refund is obtainable where the advance hire agreement for plant and machinery is at a level in excess of that required to satisfy the site clearance and preparation orders actually obtained.
A summary of the information relating to the above points is as follows:

Level of Sales orders	Probability	Revenue GH¢000	Variable costs GH¢000	Plant and machinery hire costs
				Advance GH¢000	Conversion GH¢000
High	0.25	15,000	10,500	2,300	1,500
Medium	0.45	8,500	5,950	1,500	850
Low	0.30	4,000	2,800	1,000	–
Low to medium					850
Medium to high					1,300
Low to high					2,150

Required:
(a) Prepare a table showing the outcomes for each decision and outcome combination.
(b) Prepare a pay-off matrix and determine the advance hire contract that maximizes the expected value.

Answer

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Tags: Contract management, Cost Management, decision making, Expected value, Pay-off matrix, Plant hire, Probability, Resource Allocation
Level: Level 2

Topic: Decision making techniques

Tag (SQ): Expected value

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PSAF – L2 – Q9.4 – Provisions and Contingent Liabilities

Account for contract cancellation, court ruling, and revised contract costs under IPSAS 19, including provisions and disclosures.

FM – L2 – Q70 – DCF: Risk and uncertainty

Calculate the expected NPV of a project with uncertain cash inflows affected by multiple probabilistic factors, using a 10% cost of capital.

MA – L2 – Q51 – Decision Making Techniques

Determine the optimal plant hire contract for Terra Works Ltd using expected value based on sales probabilities.

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PSAF – L2 – Q9.4 – Provisions and Contingent Liabilities

Account for contract cancellation, court ruling, and revised contract costs under IPSAS 19, including provisions and disclosures.

You're reporting an error for "PSAF – L2 – Q9.4 – Provisions and Contingent Liabilities"

FM – L2 – Q70 – DCF: Risk and uncertainty

Calculate the expected NPV of a project with uncertain cash inflows affected by multiple probabilistic factors, using a 10% cost of capital.

You're reporting an error for "FM – L2 – Q70 – DCF: Risk and uncertainty"

MA – L2 – Q51 – Decision Making Techniques

Determine the optimal plant hire contract for Terra Works Ltd using expected value based on sales probabilities.

You're reporting an error for "MA – L2 – Q51 – Decision Making Techniques"

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