Volatility
of Project
Volatility of project varies with the length of period.
it means longer period project has higher volatility and shorter period has
small volatility. Relationship between time and volatility has been explained by
the following formula
S.D
(Longer period) = S.D (short period of time) √T – measure of volatility
Volatility
of Project example
Project has cash inflow of 200,000 annual. Life of
project is 5 years. Volatility in cash flow is 30,000. Calculate the cash
inflow for 5 year and volatility.
Cash flow 5 years = 200,000 x 5 years = 1,000,000
Volatility for 5 Years = 30,000 x √5
=30,000x2.236
= 67080
