How To Do Expected Value Problem Solving

When working for a financial firm or a company that has to think ahead to stay competitive, it is very important to know the expected value of goods. Most business entities work with services and resources that have very dynamic prices. These costs are governed by random variables that have an impact on the daily operations, as well as the day-to-day lives of people who aren’t even part of the company.

Most resources in the world—such as fuel derived from non-renewable sources like natural gas, coal and other fossil fuels—are limited. This means that these resources would only grow in terms of scarcity in the coming years. Therefore, the formula for calculating value changes for these goods should take into consideration the increase in demand for these products on top the standard value of these goods at present.

Here are some considerations that one has to factor into calculating expected value.

  1. The human population is only expected to rise with the passing of time. This means that there will be greater competition for the limited goods, and this could definitely drive up the prices of products. This type of formula value has to be adjusted accordingly to reflect this expected rise in the population.
  2. There are also some goods that become scarcer as more and more of the same is mined and introduced into the market. This is true for precious metals like gold, silver and platinum that are clearly becoming more and more difficult to process and prospect. Most of the older mines have dried out, and many mining companies have had to go to other areas to ensure that the market’s exponential distribution requirement is addressed adequately at all times.
  3. There are some goods that can also go lower in price. Certain types of technologies such as that of laptop computers, digital media players, and other gadgets that used to be the cutting edge are becoming cheaper and cheaper to produce. With more efficient technologies that make the production of such goods less expensive and much more advanced, technology is becoming either cheaper or more powerful. Therefore, one should usually factor in this effect when valuating technology.

These assumptions apart, accountants would usually estimate the expected value of a commodity or an asset years down the road by using several formulas. These include depreciation techniques, such as straight-line depreciation, in which an asset loses a certain percentage of its value every year, such that at the end of its economic life, the “book value” is actually zero. Economists would even factor in inflation, to determine both the nominal and real values of any asset at any given time.

Computing for expected value can be tricky business, since one cannot really account for all the events that will ultimately influence the prices of goods. Unexpected events such as natural disasters, terrorist attacks and other factors have been game changers, so those who speculate and approximate should be ready for any eventuality. Ultimately, these computations are the expertise of accountants, actuaries and economists.


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