Finance Numericals

Decision Tree : It is a tool which helps to measure risk in uncertainty. It is tree like diagram which shows decision and its alternatives and probability of occurrence of an outcome of alternatives. It helps to calculate Expected Monetary Value (EMV). Symbols uses in diagram are as follows: Advantages of decision tree: ·          It is simple to draw decision tree diagram ·          It is easy to understand by ordinary people. ·          It shows all alternatives and their possible outcomes. ·          It helps to make a decision. Disadvantages of decision tree: ·          It shows less accurate result if there is lots of nodes in decision tree diagram. ·          It does not show the reality because outcomes of different alternatives are based on expectation. Expected Monetary Value = Probability*Outcome Example:  Mr. B has Rs.5, 00,000 and he wants to invest it he has two options: ·         Invest in bank to earn 8.2% interest ·      

Break-Even Analysis: It is a point where total cost and total revenue intersect each other or we can say that total cost and total revenue is being equal. With the help of it we can calculate how many units of a product a company have to produce more to earn profit on it.  In below diagram if we sold more than 9 units of a product at Rs.8.5 we earn profit otherwise incurred loss. Break-Even Point (BEP) units = Total Fixed Cost/Sale price per unit –Variable cost per unit                                       OR Break-Even Point (BEP) units = Fixed Cost/ Contribution Margin per unit                                                OR Break-Even Price = (Total fixed Cost/ Total Sales) +Variable cost per unit Contribution Margin: It shows contribution in sales price which does not include variable cost. It is also called Gross profit but sometimes it is different from contribution margin because it includes variable cost and fixed cost to