WEBVTT
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In this el...excel tutorial I’m going to be talking to you about expected value.
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I want you to know that in...in this particular chapter this is the first of a series of three
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that will relate to each other.
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So, you need to watch this video first.
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Okay, basically what expected value is, is where to calculate it,
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each outcome is weighted by its probability and the results are summed.
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So, notice in this project we have three different annual benefits
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that we think are possible plus the probabilities.
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We also have a couple expected lives in here and their probabilities.
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We also have an initial cost of $20,000 and our interest rate is 10%.
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So, the first thing we want to figure out is the expected value.
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Which I said is outcome is weighted by its probability.
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So, you need to multiply the outcome that you’re looking for times its probability.
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Which you’ll notice that it’s done here in...in D6.
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It equals B6 times C6. Which is the outcome we’re looking at times its probability.
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Now to do the other three columns I can simply drag it down.
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Notice how increments to B7 times C7 and so on.
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So, our expected value over benefit is simply the sum of those products.
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So, it equals sum, highlight that, click and we’re done.
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Now, if this seems too many clicks, too many calculations for you,
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another way that you can calculate the same thing is this.
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I’m going to delete this for you. You can do equals, sum product,
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S..U..M..P..R..O..D..U..C..T..
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And what you do is you highlight your first array,
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which is the three different annual benefits we think we could have, comma, our second array,
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which is their corresponding probabilities and just close our parentheses
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and notice we get the same answer.
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So, go either way, if you feel good to have the steps to understand,
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go ahead, or you can do this way.
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Now we need to do the same thing on our life.
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Notice that we’ve done the multiplication, we’ve drug it down,
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and then here we’re simply going to sum the product.
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And you can see that we get 10 years.
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And I do not need decimals on my years so I’m simply clicking them out.
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Now that we’ve taken to account our...our different benefits with our different probabilities,
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our different expected lives with their probabilities,
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now we can figure out the present worth of our expected values.
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So, to do this, what you’re doing now is you’re going to do equals, present value, our rate is
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the 10 percent found in B3, our year is going to be our expected value for the years
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and our payment is going to be negative our expected value of our benefits.
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And remember that sitting back there, already at the present, is the $20,000 that we invested.
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So, in this case, we get a present worth of our earned value,
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or I mean expected value,
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sorry I keep saying the earned,
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when it’s expected value, is $19,000, almost $20,000.
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Which means your project is viable because it’s above 0.
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So, in this tutorial I’ve shown you how to use probability in relationship
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to...to different benefits that you might have, or different expected values.
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By using those expected values you can get a better feel for when you have a probability
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mixed in with your economic analysis.