Improving the Informational Content of the Simple Capital Budgeting Model
Improving the Informational Content of the Simple Capital Budgeting Model
Peter Brownell
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This introduces difficulties into the analysis for, without knowledge of the distributional form of sales (i. E. Normal, poisson, gamma, etc. ) we generally cannot discover its standard deviation. For our purposes I introduce the greatly simplifying assumption that sales are normally distributed with y of 25, 000. This provides for computational ease and also allows a convenient, albeit crude, opportunity to elicit an estimate of the standard deviation. The sales manager or market research team... responsible for the estimate of y=25, 000 are once again consulted and asked "within what range about 25, 000 units annually, are you 2/3 (i. E. 66 2/3?o) certain that sales will fall?" This provides an estimated of the standard deviation of sales (a). We will recall that approximately 68% (68. 26?c to be exact) of the area under the normal curve lies within the range y - la. -7 Suppose thst o is thus estimated to be 2, 000 units. Some vital information related to the decision is now available.
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