1. avatar says

    Hello Mr. Moffat,

    I learned in class that in the decision tree, the decision points and the outcome points should be labelled from the top right of the tree, then moving across to the left…

    I was also taught that the decision forks you drew to indicate the decision you made, were actually supposed to be placed on the decisions you didn’t want to make…

    Are these points worth stressing over?
    Or the way you did it is acceptable?

    Thank you!

  2. avatar says

    Dear John,

    Thank you for your brilliant lectures, I much prefer this style, a bit quicker than in the classroom recording, however, both are good quality.

    I have a question on this subject, perhaps a repetition of Chris’s question in Oct 14. As we are working the decisions backwards, we would have known the “best” option to go for. In this instance, the option to go with market research with expensive refurbishment. However, at this point, if the return is then diminished by the cost of the market research, would going without the market research and refurb expensively be the better option? Thank you kindly.

  3. Profile photo of Bakhtawer says

    dear Mr. Moffat , I have been doing these decision tree questions and find a difference that has often caused my answer to come out wrong.Here is a sample question:

    Q.a company has prepared the design for a new product .It can either sell the design for $100000 or attempt to develop the design into a marketable product at a cost of 150000 .If the company decides to develop the product the chances of success are .7 .If the attempt fails the design can be sold for 20000.If the attempt succeeds the business has the choice of either selling the design and developed product for 180000 or marketing the product.If the product is marketed then there is a .6 probability that the product will generate a cash inflow of 800000 and a 0.4 probability that it will generate a cash outflow of (100000).Both figures exclude items previously mentioned.

    , the answer shows tan ev of 164000 of developing.This has been arrived by subtracting the 150000 from each outcome of developing i.e. from both 800000 and -100000 BEFORE taking the expected value of these outcomes.Now i simply took 800000 and -100000 as is and later when i rolled back to the point where development came i.e. the first of the two branches of developing or selling , there I subtracted the 150000.But my answer doesn’t match , in the question that you have done in the video .Which approach should we take when we have a common cost for one single Option leading numerous other options should we subtract that cost from each option and then take expected values or should we find out the EV of that option first and later subtract that cost.

    Please solve this confusion Mr. Moffat you’ve always been great help.Appreciate all that you do.(p.s i got an 85 in f3 from Only watching your videos so Thanks mate!)

    • Profile photo of John Moffat says

      In future, please ask questions like this in the Ask the Tutor Forum, not as a comment on a lecture.

      Either approach will always give the same answer (and the 164,000 is correct).

      If you take the 150,000 from all of the flows before you start rolling back, then second decision is the choice better selling and receiving a net 130,000; or marketing and receiving ((0.6 x 650,000) – (0.4 x 250000)) = 290,000. So you chose to market.
      So now the expected value of continuing in the first place is (0.7 x 290,000) – (0.3 x 130,000) = 164,000.

      (I am guessing that maybe you did not deal properly with the fact that the net outcome of some of the options is negative)

  4. Profile photo of Ahmed says

    Hi john,
    Thank you very much indeed for such an excellent lecture sir,i did understand everything else in risk and uncertainty lecture but bit confued about the aritmatic of maximin and minimax,could you help please? 😀

  5. avatar says

    Goodday! How do you know that that buying a market strategy and getting a poor result does not include an option of expensive refurbishing?
    Do we have to start the decision tree from the market strategy and why?

    • Profile photo of John Moffat says

      The question says in the last sentence “….if the research indicates a poor result, then they will only be prepared to consider the cheaper refurbishment”

      We do not buy marketing strategy – we are considering buying market research.

      The tree needs to show the decisions in the order in which they will be made. The first decision will be whether or not it is worth buying the research and so this is the first decision to show on the tree.

  6. Profile photo of Sherls says

    Hi Sir

    Is sensitivity analysis still part of the F5 Syllabus? I did review the syllabus 2015 and didn’t see it and also i didn’t see it in your notes or lectures so far, I have only done up until Risk and Uncertainty. I know it is a small part of the chapter under Risk and Uncertainty, however as I said before I didn’t see it in the syllabus, if it is in the syllabus maybe i missed it.

    I will greatly appreciate your response.

  7. Profile photo of Noureen says


    Thank you John for the detail lectures they are a great resource however could you kindly elaborate The Value of perfect information as it is not available in the course notes also there is no lecture on it. Would appreciate if you could kindly elaborate.

    Many thanks

    • Profile photo of John Moffat says

      It is part (c) of example 1 on Page 46 of the Lecture Notes.

      At the moment, the lecture does not deal with part (c) – I must re-record it – but the answer at the back of the Lecture Notes should make it clear.

  8. Profile photo of manonaseriousmission says

    Thanks as always John for your brilliance at conveying useful and intelligent information across during every lecture. This one yet again was superb! My comments now will perhaps be the longest you’ve ever had to read on these forums, so my bad.

    I have always viewed Decision Trees, amongst a few other topics, as Marmite – you either love or hate them. For me, it’s been a hate journey with DT until recently, when I realised that decision tree questions are best tackled by first understanding what in the world any management accountant are actually attempting to do with the concept in real life.

    The more I try to understand the concept rather than just chucking in numbers and probability figures as I read the question, the more grasp of the topic I’m getting. This particular video of yours has just reinforced my take on the topic, as you sort of showed at the beginning part of your working, that it is just best to read and somewhat understand the question first and then draw out the decision tree based on the paragraphs in the question, without being unduly caught up in the complicated bits such as the figures/probabilities just yet. To bug oneself down about the numbers too early on can complicate things and make one’s working a tad messy and confusing.

    Just as you have shown in this example, once a meaningful tree (comprising different courses of action as spelt out in the question) has been drawn, then the figures can be slotted in, making sure that one considers carefully what the proceeds are and what the costs are (I particularly like your idea of using a bracket right off in distinguishing the costs).

    Ultimately, I have found that the process of establishing a Decision Tree from Left-Right is as important as the backward working from Right-Left, because where the former helps to establish what alternative courses of action or outcomes exist, the latter helps with the actual decision through an assessment of what appears to generate a better result (most likely by way of better revenue).

    I am so grateful for the way you have taken the time to demolish (in a good way) this question for better understanding of the concept. I will continue to attempt a few more questions on this topic so I can be more confident on the day of exam, should it come out.

    Can’t thank OT enough

  9. Profile photo of Chris says

    Hi John,

    thanks for such a detailed lecture on this! One question i need to ask though is why don’t we take in the initial cost of the research at say points B etc?

    Many thanks in advance.

      • Profile photo of Chris says

        Hi John,

        thank you. Yes i appreciate in this case that the outcome is still the same however, had the results been closer together the $200,000 would have a bearing on which choice we would make…. wouldn’t it? I may be over complicating this but it’s just so i understand in my mind rather than just doing the question and assuming.

        Thanks again.

      • Profile photo of John Moffat says

        No – the actual final amounts would be exactly the same.

        Don’t forget that at points A and B in my answer, they are the outcomes if we do not do the research.

        Whether or not it is worth doing the research is one of the decisions that we have to make.

    • Profile photo of John Moffat says

      You can start like that if you want.

      But it would make no difference at all because from the ‘no market research’ branch you would immediately have another decision – ‘expensive’ or ‘cheap’ refurbishment.

      (The tree is only to help keep track of the various decisions, so for this bit of it you can draw it either way)

  10. avatar says

    Hi John. In the third paragraph of this example, (in EITHER case the probability of the refurbishment achieving a good result has been estimated to be 2/3). Why are we not using 2/3 on the ‘buy market research’ path?

    • Profile photo of John Moffat says

      Buying market research is our choice – so buying itself is not uncertain and therefore no probability is relevant.

      As to what happens if we do buy the research, the question says (in the next to the last paragraph) that the probability then of the result being good is 91%.

      (If the research was perfect, then if it said ‘good result’ then getting a good result would be certain. Here, the research is not perfect and so it is not certain to be ‘good result’ but it has a very high probability. Similarly, if the research says ‘bad result’ then the probability of the research being wrong and getting a ‘good result’ is 13%)

      I hope that makes sense.

  11. avatar says

    Dear John. I’ve sat only F4 so far and don’t remember whether we could use black pen only. Are we allowed to use different colours in F5 to make our graphs and decision trees more understandable?

  12. avatar says

    Pheeww! 😛 A bit complex I must say! Sir, I have one question. For the final answer you said: Buy market research and if the result is good do the expensive refurb. If result is poor then shut.

    I agree with the first part i.e buy market research and if result is good then do expensive refurb which will give us 7.43M. But if we shut we will only get 5M.

    How about we don’t do market research and get 7.17M, ain’t it better than getting 5M if we shut?

  13. avatar says

    Hi sir..just wanna ask….um can a decision point (the square) arises after an outcome( the circle) as the usual way is that in a decision tree it only has ONE decision point which is the square at the far left( the beginning) and a lot of outcome….

    • Profile photo of John Moffat says

      Yes it can – there can be several decision points. In fact it is more likely that there will be several and not just one decision point.

      (Maybe the first decision is which machine to buy, but then after a year or two we need to make a second decision as to whether or not to sell a machine and the decision can be affected by how well or badly the machine has been doing in the first one or two years.)

      The example in the course notes is an example of this.

    • Profile photo of John Moffat says

      Decision trees are a bit less likely in December because they were asked in the June 2013 exam.

      However, they could be asked. I cannot really add anything to what I say in the lecture, but if you say where you have the problem then I will try my best to help!

      • Profile photo of adejumolu says

        Thank you very much Mr. John Moffat. You are one of the best teachers I’ve listened to. I just don’t understand when to start calculating the expected values. I pray it doesn’t show up this December.

  14. avatar says

    The problems with expected values mentioned at the end of part A of Risk and Uncertainty include: Actual profit will not be equal to expected value. I understood that it will be equal to one of the profit figures in real life and not the average(expected value)

    We have used expected values for our decision tree calculations. How reliable is our decision tree in real life? Wouldn’t the profit from refurbishing be either one or the other and not an average(expected value)?

  15. avatar says

    great lecture i did benefit a lot …thank you ..but i am wondering why u did not include the aspect of the VALUE OF PERFECT INFORMATION which was recently added to the syllabus?

    • Profile photo of John Moffat says

      If you look at example 1 in the course notes, you will see that perfect information is covered. The changes to the syllabus were announced over six months ago and our course notes were updated immediately.

      Perfect information does not require the use of a decision tree (although obviously you could draw a decision tree just as you could draw one for any decision under uncertainty. In practice you would only draw a tree if it helped you – there is no need in example 1; in the exam you only draw a tree if you are asked to.

  16. Profile photo of cecel says

    Hi John,
    After going through the lecture at least twice, I finally understand every aspect of example 2 that you explain and will attempt the 2012 past paper question. It was a reall………………y good lecture!! I must say though, that like ‘Miss A’ I was wondering how come you included the ‘shut down’ option if Combi did the market research and the result was poor, when the question indicated that they would only be prepared to consider the cheap refurbishment. I felt that you included it because the only reason they would also consider shutting down would be due to cost factor, since if the result is poor it doesn’t make sense to invest in an expensive refurbishing. plus with or without the research the shut down will yield 5m, which is less than the 4.6m return from the cheap refurbishing with the research. Let me know if my logic is heading in the right direction.

    • Profile photo of John Moffat says

      It is very unlikely that the exam would ask for a complicated tree. More importantly she is likely to just test your understanding with a fairly simply problem (and a fairly simple tree).
      Do realise that the whole point of the exam is to test that you understand what you are doing – not to try and make you do terribly complicated things!

  17. Profile photo of Miss A.. says

    Dear Sir, I can’t understand that why do we have an option of shutting down the office when market research has poor results ??The question indicates that if we do market research & the result is poor, then we will only be prepared to consider the cheaper refurbishment?

    shouldn’t only be cheaper refurbishment option be there if the market research has poor result , as per the question’s statement? ( And NO shutting down or expensive refurbishment should be included)

  18. Profile photo of numero270 says

    I have a question

    31:36 – 31:57

    Do Mkt Research/Good Result/Expensive refurbishment.

    The lecture calculate
    Net expected value = Expected value – refurbishment cost
    = 12.87m – 4m = 8.87m

    Why didnt include the cost for market research:
    Net expected value = Expected value – market research cost – refurbishment = 12.87m – 4m – 0.2m = 8.67m

    I do notice its just a small difference and it would not affect the final answer but it got me puzzled abit.

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