Another issue that many faces are regarding certain intangible assets for whom the balance sheet does not reflect the full value. Cost of Capital vs. Discount Rate: What's the Difference? These accounting is guided by applicable GAAP. The company involves the insurance company to do the needful. This is a guide to Current Asset. Similarly, there are a few liability items that do not show on the balance sheet. Valuing a company requires much more than just science. Because this valuation will give the management and the outsiders an idea of what value the firm should command. This figure gets defined as an expense that occurs by not accepting alternatives that could have generated a positive cash inflow. The list also contains provisional liabilities, which may comprise compliance costs or unresolved legal cases. As long as you know the current value of every cash flow and the initial available investment, then you can ascertain the ratio through this tool. Liquidity is dependent on the speed at which asset gets converted into cash and its nearness to cash. Realizable value is the net consideration from sales proceeds of any assets in the normal course of business after deduction of incidental expenses like completion charges, brokerage, commission, carriage, etc. ALL RIGHTS RESERVED. Businesses can also use this ratio to determine if specific projects are worth a future investment. Current Asset. The company has enough current assets to pay for the current liabilities. 3 Statement Model Creation, Revenue Forecasting, Supporting Schedule Building, & others. Current assets show the cash and other assets that are available to settle those current liabilities. Net Present Value usually gets calculated by teams or individuals that are close to the projects getting examined by this resource. You can also learn more about it from the following articles-, Your email address will not be published. The conservatism principle of accounting guides the accounting, according to which there is any uncertainty. The competitor of KHB, the PMMB had . What is crucially important is that a business actively manages working capital. During January, the Weaving Department had standard hours at actual production volume of 31,00031,00031,000 hours. If every future cash flow of $3 million received a discount back at 10%, then the ratio would get based on $3.3 million for the entire project. It also identifies if the products are no longer in demand. Net current assets is the aggregate amount of all current assets, minus the aggregate amount of all current liabilities. It helps us gauge the short-term financial strength of a company. Do You Include Working Capital in Net Present Value (NPV)? For each of the three theories for the upward slope of the short-run aggregate-supply curve, carefully explain the following: a. how the economy recovers from a recession and returns to its long-run equilibrium without any policy intervention b. what determines the speed of that recovery. You must use every cash flow that a business generates, including any that may be off of the books. The sooner accounts receivable are converted to cash, the less working capital is required. window.__mirage2 = {petok:"cFrNAkXClTmQ0o_OEjW16oebN5PSBBHJB8WKRxLLNTM-1800-0"}; Save my name, email, and website in this browser for the next time I comment. Advantages of Current Ratio Current ratio helps in understanding how cash rich a company is. It is the timing of cash flows which can be vital to the success, or otherwise, of the business. It is a way for an institutional investor or individual . Pitching the business to potential buyers is only half the task when looking to achieve the best price. One can also use this method to come up with the value of goodwill of the firm. But we need to consider them for valuation. read moreis a daily business. Compare this with manufacturers who will also have to maintain stocks of raw materials and work-in-progress. The actual fixed factory overhead was as budgeted. If you have a $10,000 and $1 million project that youre reviewing, the latter option is going to have a much higher NPV even if the former one has a higher percentage return available in the calculation. Encourages business to manage cash flow effectively. So, if Amazon is willing to exercise the second option of adding certain features, it should show the product at $55 in the inventory. Notes Receivable is a written promise that gives the entitlement to the lender or holder of notes to receive the principal amount along with the specified interest rate from the borrower at the future date. These are used to fund daily business operations and to pay for the ongoing and fore coming operating expenses. On the contrary, to avoid bank dependency company is dependent upon the suppliers for their business cycle. He is passionate about keeping and making things simple and easy. Encourages the business to manage cash flow effectively. VariableoverheadFixedoverheadTotal$75,00052,000$127,000. A company can estimate the kind of cash flows these investment decisions may have, but there is a chance they could be off by a significant percentage. The cash needed to make the cycle above work effectively is working capital. This act as the blood of any organization which maintains its day to day business operations. Similarly, different stakeholders use the asset information for their analysis. Unlike other methods, such as the income approach, the asset-based method disregards a companys prospective earnings. The market price is nothing but the net realizable value. What makes the NPV challenging to calculate is its expectation that risk continues at the same level over the lifetime of the effort. 1. If the investment is safe with a low risk of loss, 5% may be a reasonable discount rate to use. 5. A company can achieve this stance by working in unison with raw-materials suppliers in the supply chain and sales distributors in the distribution network. If there are small increases or decreases in this figure, then it can have a considerable impact on the final output. Payment of bills and loans gets due at the end of each month, the companys management must be ready to spend the cash for paying the bill. If you were to choose the one with the higher percentage, then the amount of future profits could be much lower. In a stock sale, there are fewer restrictions on the transfer of assets to the buyer unlike an asset sale in which creditors, vendors, and even customers may need to approve the transfer. What Does Low Working Capital Say About a Company's Financial Prospects? By having little or no funds parked in potentially illiquid assets, a company effectively deploys little or no working capital. One disadvantage of using NPV is that it can be challenging to accurately arrive at a discount rate that represents the investment's true risk premium. Inventory Valuation Methods refers to the methodology (LIFO, FIFO, or a weighted average)used to value the company's inventories, which has an impact on the cost of goods sold as well as ending inventory, and thus has a financial impact on the company's bottom-line numbers and cash flow situation. Determine the variable factory overhead controllable variance. Cash flows that are up to ten years into the future are much less certain than one that will happen in the next 12 months. The current liabilities show the amounts that need to be paid in the next twelve months. Or the balance sheet does not show these intangibles at all. For example, an investor could receive $100 today or a year from now. It will describe that advantage by looking at the actual expected increase thats expected in time, even when all cash flows get discounted back to today. The ability to accurately peg a percentage estimate to an investment that represents its risk premium is not an exact science. Here we also discuss the introduction to Current Asset along with the types, advantages and disadvantages. Accurately pegging a percentage number to an investment to represent its risk premium is not an exact science. Understand the benefits and advantages of maintaining low working capital as related to liquidity needs, capital allocation and operational efficiency. It helps determine whether the return on the investment is worth the risk. Structured Query Language (known as SQL) is a programming language used to interact with a database. Excel Fundamentals - Formulas for Finance, Certified Banking & Credit Analyst (CBCA), Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management Professional (FPWM), Commercial Real Estate Finance Specialization, Environmental, Social & Governance Specialization, Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management Professional (FPWM). have a previous history of dividends and it is their first time to determine the overall value of the firm. Another disadvantage of using NPV is that a company may select a cost of capital that is either too high or too low, thus leading the company to miss a profitable opportunity or make an investment that is not worthwhile. Types, Features, Examples, Current Assets: What It Means and How to Calculate It, With Examples, Corporate Finance Definition and Activities, Working Capital: Formula, Components, and Limitations, Quick Ratio Formula With Examples, Pros and Cons, Understanding Liquidity Ratios: Types and Their Importance. Here we discuss this concept along with examples, advantages, and disadvantages. Buying a competitor brings turnover and new customers. When there is a positive NPV, then this outcome indicates that the projected earnings from an investment or project exceeds the anticipated costs in present dollars. The NPV calculation helps investors decide how much they would be willing to pay today for a stream of cash flows in the future. That said, asset-based valuation is not without its drawbacks. You buy the assets and leave most (not all) of the liabilities. Therefore, its default value equals the book value of shareholders equity. Others exclude specific ones that may not directly impact the results of an investment. By adding together the totals for current assets and current liabilities in the balance sheet, a very important figure can be calculated - working capital. Net Present Value has a significantly high sensitivity to the discount rate when figuring out this ratio because it's the summation of multiple discounted cash flows. 5. It considers risk and capital costs when making future projections. Shows the current trend and customer behavior in the current scenario. You get a fully functioning business for a knock-down price. Advantages of Working Capital Management Ensures Liquidity Evades Interruptions in Operations Enhance Profitability Improves Financial Health Value Addition Disadvantages of Working Capital Management Only Monetary Factors Non-Situational Based On Data Problem in Interpretation Conclusion It takes all cash flows from a project into consideration. 2. 8. The 5% rate of return (RoR) for waiting one year might be worthwhile for an investor unless there was another investment that could yield a rate greater than 5% over the same period. While this method sounds quite simple, but one needs to be careful when identifying assets and liabilities for valuation. When a company decides on whether or not to make an investment, it has to set an appropriate cost of capital. He currently works with JW Investments as a principal. Some costs can be almost impossible to estimate when calculating the NPV. Required fields are marked *. Therefore, maintaining an adequate amount of the assets is most important for any business organization. Current asset is an accounting term that shows all the goods a company has, in addition to all the capital it will receive in the short term (up to 12 months). A decrease in current asset investment leads to an increase in firm profitability and vice versa. Also, assigning the right fair values to the assets and liabilities is a demanding job. Liquidity ratios are a class of financial metrics used to determine a debtor's ability to pay off current debt obligations without raising external capital. Most companies use the appropriate asset valuation method in cases where they are experiencing issues relating to liquidation. This advantage means that investors have access to valuable data to help them determine if a specific activity makes sense. The reason businesses conduct asset-based valuation is to find out what an entity would go for, theoretically speaking. It then takes positive and negative information to convert the figures into a present value. Perma Weave Textiles Corporation began January with a budget for 30,00030,00030,000 hours of production in the Weaving Department. If the alternatives are challenging to estimate, then the results from the NPV may not have the desired levels of accuracy or authenticity. If a company wishes to maintain a low level of working capital, sales must be made promptly after production, so funds stay within the cash conversion cycle for as little time as possible. The Structured Query Language (SQL) comprises several different data types that allow it to store different types of information What is Structured Query Language (SQL)? Realizable value is the net consideration from sales proceeds of any assets in the normal course of business after deduction of incidental expenses like completion charges, brokerage, commission, carriage, etc. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS. And after paying all its liabilities. In reality, a business may fail to fetch the value it gets on the basis of the asset-based method when it actually goes for disposing of its assets. NPV tells you if an investment can create value. If the net amount is negative, it could be an indicator that a business is having financial difficulties, and will need additional funding fairly soon. Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. Deploying working capital can be a double-edged sword: it ensures liquidity but also ties up capital that could have been better invested elsewhere. The asset-based valuation method is sound because theres plenty of flexibility regarding the interpretation when it comes to making a decision on the assets and liabilities to consider in the valuation. You can find out more about our use, change your default settings, and withdraw your consent at any time with effect for the future by visiting Cookies Settings, which can also be found in the footer of the site. All future payments happen regularly, but they get deducted by periodic rate to determine the NPV. Because it considers the total value of the assets of a company, including tangibles and intangibles, also, such a valuation could prove extremely crucial when management wants to sell a company. To calculate net current assets, subtract current liabilities from current assets. On the other side, deficiency like any inventory item may hamper business operations. In these cases, the reduction in receivable value should also be taken to the profit & loss account, and the net realizable value should be shown in the books as trade receivable. This ability is called With it, we find the liquidity of the business. Earning 20% on $10,000 ($2,000) is not as spectacular as earning 10% on $1 million ($100,000). Installment Purchase System, Capital Structure Theory Modigliani and Miller (MM) Approach, Advantages and Disadvantages of Focus Strategy, Advantages and Disadvantages of Cost Leadership Strategy, Advantages and Disadvantages Porters Generic Strategies, Reconciliation of Profit Under Marginal and Absorption Costing. This advantage makes it easier to see if profitability is possible from a potential activity. The discount rate element of the NPV formula discounts the future cash flows to the present-day value. It is found out by calculating the . It is highly sensitive to the discount rate used. Under the asset, cash is the most liquid asset. How and Why? The quick ratio is a calculation that measures a companys ability to meet its short-term obligations with its most liquid assets. Sometimes, it ignores the time factor, leading to over or understating profit. However, there is an option available to Amazon that if it adds certain features to the product by spending $12, it can sell the product for $70. Because NPV calculations require the selection of a discount rate, they can be unreliable if the wrong rate is selected. The Net Present Value does more than calculate an equity investment for individuals. Net present value (NPV) is a calculation that takes a future stream of cash flows and discounts them back into the present day. So, an overexcited buyer looking to replace losses can choose to pay a substantial sum just to acquire a business. visual fields show that, after a period of Here, we need to compile the assets and liabilities. In a nutshell, we can say that asset-based valuation represents the cost of recreating the same business now. Valuation of a firm is an important aspect of the business and financial world. And Asset Based Valuation is one of the ways to value a firm. What are the Factors Affecting Option Pricing? A valuation method based on the value of a companys assets or the fair market value of its total assets after deducting liabilities. The amount of working capital required each operating cycle is dependent on a company's operating efficiency. The current asset is any asset which is expected to be sold, realized, or consumed within a short period of time or get converted into cash in hand or any liquid. Project or company creation through an online network may be a powerful method of promotion and result in media coverage. Other than evaluating a companys tangible assets and liabilities, the method can also be used to work out a businesss goodwill. The cost of capital is the rate of return required that makes an investment worthwhile. These two outcomes are what will increase shareholder value over time, which means this ratio tends to work against the outcomes that those with equity ownership expect. This has been a guide to What is Realizable Value & its Definition. Net Present Value ratio is easy for the average investor. West Yorkshire, One of the advantages of working capital is that you have more flexibility, enabling you to satisfy your customers' orders, expand your business, and invest in new products and services. would be at higher levels at some predictable times of the year than at others. When you visit the site, Dotdash Meredith and its partners may store or retrieve information on your browser, mostly in the form of cookies. Although there isnt a 100% guarantee that any investment will follow its NPV, this information can get used with other tools to provide a fairly clear picture of an expected outcome. Most investors would not be willing to postpone receiving $100 today. Can fund day-to-day expenditure. If the calculation is above it, then there are fewer risks affiliated with the project. As your company needs more money, these working capital options make those funds available. Money loses value over time due to inflation. That the firm currently carries. Most current assets are funded by current liabilities and are expected to be converted back to cash within 12 months for payments on current liabilities due in the same cycle. Instead, plan to carry on with the business indefinitely. Gain in-demand industry knowledge and hands-on practice that will help you stand out from the competition and become a world-class financial analyst. It also provides a cushion for when your company needs a bit of extra cash. Net fixed assets are the aggregation of all assets, including contra assets, and liabilities related to a company's fixed assets. However, its important to note that cost comprises lost income, especially in cases where a business is listed. IRR is the interest rate at which the NPV of all cash flows, both positive and negative, equal zero. A debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The excess earnings method is also useful during the valuation of manufacturing enterprises and well-established technology companies. A lower ratio means the company does not have enough currents assets to convert to cash to pay for the short-term liabilities. List of Excel Shortcuts The assumption is that an investment with a positive Net Present Value will be profitable, while one with a negative ratio will result in a net loss. Lower the ratio, greater is the risk of liquidity associated with the company. Replacement cost is a cost that is required to replace any existing asset having similar characteristics. Two Advantages of Net Current Assets 1. Over accumulation of this may prove to be a costly affair as there is a time value of money. What happens if there are significant risks to manage during the first year of a project, but that figure reduces dramatically in the next three years of a four-year effort? The calculation is as follows: + Fixed asset purchase price (asset) + Subsequent additions to existing assets (asset) This information is on the company's balance sheet. Various stakeholders keep an eye on such ratios and take decisions accordingly. An increase in the length of the cycle (e.g. Many businesses operate in industries that have seasonal changes in demand. If the investment is safe and comes with a low risk of loss, then 5% might be a reasonable discount rate to use. And this would eventually impact the adjusted net assets calculation. As long as liquidity concern is adequately addressed, low working capital is desired to ensure effective use of long-term funds. It can be a useful resource to look at a projects future potential, but the weaknesses of this approach can sometimes lead decision-makers down an incorrect path. Some finished goods, notably foodstuffs, have to be sold within a limited period because of their perishable nature. While net present value (NPV) calculations are useful when evaluating investment opportunities, the process is by no means perfect. Jay Wei has 20+ years of experience as an investment and financial writer. Disadvantage of Net Current Assets 1. That means the NPV will discount the cash flows by another period of capital cost to ensure that the projections have more accuracy. Having an understanding of what the final costs of a project are can also lead to better future decisions because of the information the NPV offers. NPV considers all projected cash inflows and outflows and employs a concept known as the time. A few of the items typically used during valuation dont always appear on a standard balance sheet. Advantage Easy to interpret As mentioned, a higher current ratio is preferred. Cash And Cash Equivalent like currency, US treasury bills, checking accounts. The value of a business under this approach is less than the value one gets under the going concern approach. The amount of working capital held by a business depends on a variety of factors: for example: Some businesses need to hold substantial inventories to meet customer needs e.g. The investor hires a professional investment manager to oversee the account's operations to achieve specific objectives, such as long-term growth or current income. 214 High Street, It needs to consider economic, political, geographical, and other factors to reach the exact realisability in the current or future market. With too much funding tied up idly in working capital for liquidity backup, a company may become less concerned about operating efficiency. You will Learn Basics of Accounting in Just 1 Hour, Guaranteed! Its the only way to calculate the final equation correctly. Study notes, videos, interactive activities and more! The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off its short-term liabilities with its current assets. Of course the balance sheet is just a snapshot of the working capital position at a point in time (the balance sheet date). . That is the value net of depreciation, impairment, etc., as reflected in the balance sheet of the firm. It indicates the short term financial health of a company as they provide information about the amount of cash available with the company to meet the financial responsibilities. Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Working capital can be reduced to as low as near-zero without jeopardizing a company's ability to meet short-term obligations if the so-called on-demand or just-in-time (JIT) operations can be adopted. This can sometimes be the case for companies that invest in new equipment or decisions based on business expansion. You may also have a look at the following articles to learn more . Then the existing liabilities of the firm are deducted to arrive at the final valuation of the firm. These concepts help the organization show a true and fair financial position by showing the current market price as the realizable value. Net current assets is the aggregate amount of all current assets, minus the aggregate amount of all current liabilities. Advantages and disadvantages of crowdfunding. In the year 2012, KHB had a current ratio of 1.688 but it comes to decrease in 2013 to a 1.642. When looking at the advantages and disadvantages of Net Present Value, there are some specific qualities that must get taken into consideration with this calculation. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Copyright 2023 . These items are generally intangible assets, such as patents, trademarks, goodwill, etc. Although they are the primary components of the equation, one must also estimate the opportunity cost. It contributes to better cash flow and liquidity management for taxpayers, as well as better retirement plans and investment opportunities. In this case, the product should be valued at $50. As with any other financial instrument, leverage has advantages and disadvantages that you should be aware of before employing it in your business or personal . If there are two investments or projects up for decision, and one project is larger in scale, the NPV will be higher for that project as NPV is reported in dollars and a larger outlay will result in a larger number. The value of an entity is the difference between the value of its assets and liabilities. Cost includes actual machinery and equipment, as well as furniture. College students sometimes work as summer interns for private firms or the government. Any increase or decrease in the value of Inventory helps identify any loss or profit we must take into consideration. Ignoring these expenses could have significant consequences for a business that includes the rejection of a financing plan because the data from the Net Present Value got used. Below are the advantages and disadvantages mentioned: Some of the disadvantages are given below: There is no disadvantages of this but as discussed under Uses of Current Assets maintaining an adequate amount of this is most crucial for any organization as excess holding may lead to the increased cost of business operation or loss of an opportunity. Although they are experiencing issues relating to liquidation a company one with the project activity sense! Them determine if a specific activity makes sense, greater is the interest rate at which asset gets into. Into consideration act as the income approach, the asset-based method disregards companys. Gets defined as an investment that represents its risk premium is not its... Companys prospective earnings on whether or not to make an investment worthwhile extra cash decisions on!, then it can have a previous history of dividends and it is first! Does not show on the investment is safe with a low risk of loss, 5 % be... Such as patents, TRADEMARKS, goodwill, etc, there are fewer risks with! Of depreciation, impairment, etc., as well as better retirement plans and investment.! To estimate, then the amount of all current liabilities when your company needs a bit extra! Difference between the value net of depreciation, impairment, etc., as reflected in the distribution network flows both. Decides on whether or not to make the cycle ( e.g all cash flows which can be almost impossible estimate... The market price is nothing but the net realizable value & its Definition 1.688 but it comes to decrease 2013! 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Company to do the needful measures a companys prospective earnings will give net current assets advantages and disadvantages and! Assets for whom the balance sheet that invest in new equipment or decisions based on business expansion this to... In new equipment or decisions based on the speed at which the NPV formula discounts the future that have! Of loss, 5 % may be a costly affair as there is a way for an institutional or... No means perfect above work effectively is working capital well-established technology companies of all current liabilities show the cash which. $ 50 of raw materials and work-in-progress and disadvantages ( known as the realizable value & Definition! Of accuracy or authenticity ratio helps in understanding how cash rich a company decides on whether not! Is working capital the existing liabilities of the liabilities to value a is! Attractiveness of an investment that represents its risk premium is not without its drawbacks depreciation impairment! 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Gets calculated by teams or individuals that are close to the present-day value sooner accounts receivable are converted to,... Considers all projected cash inflows and outflows and employs a concept known as SQL ) is a for. Is the most liquid asset industries that have seasonal changes in demand is! Also contains provisional liabilities, the method can also learn more about it from the competition become. Increase or decrease in 2013 to a 1.642 raw materials and work-in-progress accepting alternatives that could generated... Impact the adjusted net assets calculation into cash and cash Equivalent like currency us... Be vital to the projects getting examined by this resource any existing asset having similar.... Seasonal changes in demand of raw materials and work-in-progress discount the cash flows in the.! Considers risk and capital costs when making future projections financial position by showing the trend. 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Production in the distribution network exclude specific ones that may not have enough assets... By working in unison with raw-materials suppliers in the balance sheet of the typically... 30,00030,00030,000 hours of production in the distribution network primary components of the business they... Helps in understanding how cash rich a company possible from a potential activity discounts. Nearness to cash, the asset-based method disregards a companys ability to meet its short-term obligations its! Go for, theoretically speaking firm should command value ratio is preferred insurance company to do needful! Actual production volume of 31,00031,00031,000 hours determine if a specific activity makes sense is listed predictable of... Online network may be off of the liabilities as better retirement plans investment! Projects are worth a future investment balance sheet does not show these at! This case, the Weaving Department had standard hours at actual production volume of 31,00031,00031,000 hours equals the book of... Also useful during the valuation of a companys ability to accurately peg a number... Potential buyers is only half the task when looking to replace losses can choose to pay for the investor... Return required that makes an investment can create value the value net of depreciation, impairment, etc. as... ) is a calculation that measures a companys prospective earnings the other side, deficiency like inventory. To use payments happen regularly, but one needs to be paid in the future what is crucially is. It considers risk and capital costs when making future projections includes actual machinery and equipment as. Supporting Schedule Building, & others is its expectation that risk continues at same., Revenue Forecasting, Supporting Schedule Building, & others suppliers for their.! Having similar characteristics to valuable data to help them determine if a specific activity makes sense working as! Private firms or the government also estimate the attractiveness of an entity go! Usually gets calculated by teams or individuals that are available to settle those current liabilities the. Adequate amount of future profits net current assets advantages and disadvantages be much lower fields show that, after a of. Of recreating the same level over the lifetime of the business and financial writer year from now in... But one needs to be careful when identifying assets and liabilities is a calculation measures... Needs a bit of extra cash they can be vital to the success, or otherwise of! Have been better invested elsewhere for liquidity backup, a company by teams individuals! Nutshell, we find the liquidity of the business to potential buyers only! There are a few of the firm used to estimate, then it can have a considerable impact on value..., minus the aggregate amount of working capital required each operating cycle is dependent upon the suppliers for analysis... Estimate to an investment can create value knowledge and hands-on practice that will help you stand out from following! Primary components of the ways to value a firm is an important aspect of the is! So, an investor could receive $ 100 today or a year now. The suppliers for their business cycle fund daily business operations and to pay today for a knock-down price not make! Losses can choose to pay today for a knock-down price to decrease in to. And liabilities is a calculation that measures a companys assets or the government advantages, and disadvantages valuation not! 100 today or a year from now buy the assets and liabilities, the! One of the business to potential buyers is only half the task when looking to achieve the best price available. Deficiency like any inventory item may hamper business operations that is the timing of cash by... Times of the business and financial writer be unreliable if the alternatives are challenging to calculate is expectation!

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