Normal Probability Distribution:
The technique of normal probability distribution is very useful in analyses of element of risk in capital budgeting. The use of normal probability distribution enables the decision maker to have an idea of probability of different NPVs, i.e. the probability of the NPV of having the value of ZERO or less; greater than ZERO or within the range of two values etc.
The area under the normal curve, representing the normal probability distribution,' is equal to 1 (0.5 on either side of the mean i.e. NPV) the following formula is used to calculate the probability of different
NPVs':
Where =
X = Different Values of NPV for which probability has to be calculated
m = NPV of the project already calculated.
Value of Z may be obtained from statically tables of the area under the normal curve.