Discuss the limitation of the expected value approach

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Reference no: EM13182273

Ariba Ltd produces a range of ground coffee for commercial use within cafés and restaurants. The company is looking to extend its business and is considering bidding for the franchise to operate a coffee bar within a local shopping centre.

Research suggests that over the one-year period of the franchise, income and costs are likely to be:

Sales Revenue (£)	Probability
30,000	0.1
40,000	0.2
60,000	0.4
70,000	0.2
80,000	0.1

Variable Costs £	Probability
12,000	0.2
20,000	0.5
28,000	0.3

The franchise licence cost will be £24,000.

Required

(a) Prepare a probability distribution table and using this table, calculate the probability of:

(1) Not making a loss;

(2) Earning a profit of at least £8,000

(b) Discuss the limitation of the expected value approach to assessing the risks of taking on the franchise. What other factors should be considered by Ariba Ltd?

Reference no: EM13182273

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