Risk and Uncertainty – Decision Trees Part 1 – ACCA Performance Management (PM)
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Example 2
Last paragraph it says “if the research indicates poor result, then they will only be prepared to consider the cheaper refurbishment” then why you have you considered both shut down and cheaper refurbishment ? It should have been cheaper refurbishment only ?
Because the research might indicate a good result. We do not know what the result of the research will be until after we have paid for it!
I think they mean the wording of the question, ‘only prepared to consider the cheaper refurbishment’.
That is presumably meant to simply mean, out of cheaper and expensive refurbishments only the cheaper option is deemed financially viable (for obvious reasons).
They have read it as if the market research suggests a poor result the sole option available is cheaper refurbishment, thus it excludes the shutdown option, which I don’t think the question intended.
While I’m here thank you very much (and everyone involved) for these great lectures/resources.
Thank you for your comment 馃檪
had the same question levo explained it so well (thanks)
Dear Sir,
I have a question if market research indicates a good result then why would we consider shutting down the office?
We won’t shut it, but we need to consider it because with different returns it could have been that shutting was better than keeping it open.
Hello sir, decision trees will not be asked to be drawn in a CBE exam ofcourse but are questions such as this likely to appear? where we just have to choose an answer such as in section A and B?
You cannot be asked to draw a tree, but you are expected to understand them.
You will find plenty of questions of the type that can be asked in your Revision Kit.
Thanks so much for this brilliant presentation. The best approach to using a decision tree as I learnt from your discussion is to draw the decision tree showing the various alternatives and possible outcomes along with all the relevant cash flows associated with the decisions.
Then we calculate the expected value at each decision point and make our decision.
Thank you for your comment (but appreciate that you cannot be actually expected to draw a tree in the exam, even though it will be tested that you understand them).
Noted with thanks