George Taylor, owner of a toy manufacturing company, is considering the addition of a new product line. Marketing research shows that gorilla action figures will be the next fad for the six- to ten-year old age group. This new product line of gorilla-like action figures and their high-tech vehicles will be called Go-Rilla. George estimates that the most likely yearly incremental cash flow will be $26,000. There is some uncertainty about this value because George’s company has never before made a product similar to the Go-Rilla. He has estimated the potential cash flows for the new product line along with their associated probabilities of occurrence. His estimates follow.
Go-Rilla Project
Cash Flows Probability of Occurrence
$20,000 1%
$22,000 12%
$24,000 23%
$26,000 28%
$28,000 23%
$30,000 12%
$32,000 1%
Calculate the standard deviation of the estimated cash flows.
Calculate the coefficient of variation.
If George’s other product lines have an average coefficient of variation of 12 percent, what can you say about the risk of the Go-Rilla Project relative to the average risk of the other product lines?
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