Question

Builtrite has calculated the average cash flow to be $16,000 with a standard deviation of $4000. What is the probability of a cash flow being less than $9000? (Assume a normal distribution.)

Answer 1

Answer:

4%

Explanation:

For Builtrite, we can find the probability of cash flows by using the following formula:

Z = (X - C) / S

Average Cash Flow is $16000 which denoted by "C"

Standard Deviation is $4000 and is denoted by "S"

And

For cash flows that are less than $9000 which is denoted by X in the equation, "Z" can be calculated as under:

Z = (X - C) / S = ($9,000 - $16,000) / $4,000 = -1.75

As Z is less than -1.75, now we can see that the probability from the Z-table is 4% for -1.75.

Hence the probability of cash flow below $9,000 is 4%.