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November 25, 2015 at 2:33 pm
Hi John, I have a small doubt. At point C in the decision tree, there are uncertain outcomes. So the key at point C should be a circle. However you have made a box while writing “C”. Is it for presentation or point C is a decision point?
John Moffat says
November 25, 2015 at 4:05 pm
It is not how you write the number or letter to refer to the points that matters.
It is where the lines split that you either draw a box (for a decision) or a ‘dot’ when it is uncertain. At point C I have put a ‘dot’ which is correct.
(But make sure that you also have a key showing below that a square = decision, and a dot = uncertain (because there is not a standard – different people use different symbols))
November 21, 2015 at 2:37 pm
hallo Mr. Moffat,
since they decided that in case of poor results they will consider only cheap refurbishment, why then do you add the shut down option on the decision tree when dealing with the poor results.
November 21, 2015 at 2:44 pm
Saying that they will consider the cheap refurbishment does not mean they will do it. They will consider it and then maybe they will do it, or maybe they won’t do it (and so shut down).
October 3, 2015 at 2:10 pm
“In either case, the probability of the refurbishment achieving a good result has been estimated to be 2/3.”
Sorry I am not native English speaker, so ‘either’ mean in each/every case. Right?
I think this sentence would be really tricky in case I hadn’t seen the lecture first.
October 3, 2015 at 2:27 pm
Yes – you are right (it means in both cases).
May 30, 2015 at 3:18 am
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?
May 30, 2015 at 10:38 am
Of course the way I have done it is acceptable (otherwise I would not have done it that way!!!)
May 29, 2015 at 4:36 pm
Apology dear John, have just rewound the last part of the lecture. Point D clarified my question.
(I just wish we could use colour pens in the exam…)
May 29, 2015 at 4:27 pm
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.
May 19, 2015 at 6:07 am
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!)
May 19, 2015 at 8:15 am
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)
April 19, 2015 at 8:13 am
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? 😀
April 19, 2015 at 12:43 pm
You have asked this in the Ask the Tutor Forum, and I have answered you there.
April 19, 2015 at 1:15 pm
Opss thanks a lot ????
April 11, 2015 at 3:24 am
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?
April 11, 2015 at 8:57 am
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.
April 5, 2015 at 12:16 am
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.
April 5, 2015 at 12:33 am
It never was part of F5 – it is examined in F9.
April 5, 2015 at 2:15 am
ok. Thank you!
I saw it in a BBP F5 text while reading information on value for perfect and imperfect information.
April 5, 2015 at 2:19 am
oh sorry about that sir, my question about minimax regret was: Does it matter how you draw up your Regret Table? Meaning as in your example: if demand/sales or contract size goes horizontal or vertical?
April 5, 2015 at 9:59 am
It does not matter which way round you draw your table. All that matters is that it is clear that you understand what you are doing.
March 15, 2015 at 9:20 pm
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.
March 16, 2015 at 8:34 am
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.
November 21, 2014 at 9:26 pm
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
Sreekumar G says
November 5, 2014 at 3:45 am
This is lecture is one the best, simple and detailed explanation of a complicated topic….Thanks a lot Sir….your efforts are much appreciated, and I found it extremely useful for the students….
October 23, 2014 at 10:11 am
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.
October 23, 2014 at 1:49 pm
You can, and you will end up with the same result.
I find it easier to list each outflow and inflow separately and then take them into account when we work backwards through the tree.
October 23, 2014 at 2:47 pm
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.
October 23, 2014 at 2:58 pm
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.
May 26, 2014 at 3:35 pm
Sir can you please tell me why the decision doesn’t start with 3 branches…shut down, buy market research and no market research?
May 26, 2014 at 5:21 pm
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)
May 27, 2014 at 11:45 am
I understand, thank you.
May 21, 2014 at 4:23 am
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?
May 21, 2014 at 7:58 am
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.
May 21, 2014 at 9:11 am
I get it now. Thank you sir.
April 15, 2014 at 10:44 am
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?
April 15, 2014 at 10:49 am
You are only allowed to use a black pen
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