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Decision tree

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Decision tree

  • This topic has 0 replies, 1 voice, and was last updated 2 days ago by Prajnya.
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  • Author
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  • February 23, 2026 at 12:32 am #724829
    Prajnya
    Participant
    • Topics: 2
    • Replies: 0
    • ☆

    Kaplan
    Value of imperfect Information Eg:

    Working from right to left:
    EV(A) = (41.30% × $200,000) – $10,000 drilling costs = $72,600.
    The decision at ‘C’ should be to drill, as this generates higher benefits
    than not drilling.
    EV(B) = (0.65% × $200,000) – $10,000 drilling costs = –$8,700. The
    decision at ‘D’ should be not to drill.
    EV(E) = 0.23 × $72,600 = $16,698. This is the expected value of profits
    if a geologist is employed and exceeds the EV of profits if she is not
    employed.
    Expected Value of Imperfect Information = $16,698 – $10,000 = $6,698.
    Since this is less than the cost of buying the information ($7,000), we
    should not employ the geologist at point ‘F’.

    Sorry, I couldn’t attach the decision tree diagram here. However, EV at Decision point E, I don’t understand why the EV multiples only 0.23 * $72,600 but not 0.77 “poor prospects” part? Please help me understand.

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