BPP REVISION KIT 19/20 Q107

Can you please explain out the answer to me because it is quite confusing in the answers. Q107) A company wishes to go ahead with one of three mutually exclusive projects, but the profit outcome from each project will depend on the strength of sales demand, as follows: Strong demand Moderate demand Weak demand Profit Profit Profit/(Loss) Project 1 70,000 10,000 (7,000) Project 2 25,000 12,000 5,000 Project 3 50,000 20,000 (6,000) Probability 0.1 0.4 0.5 of demand What is the value to the company of obtaining this perfect market research information, ignoring the cost of obtaining the information? ? $3,000 ? $5,500 ? $6,000 ? $7,500 107) The correct answer is: $7,500 EV of Project 1 = (0.1 × 70,000) + (0.4 × 10,000) – (0.5 × 7,000) = $7,500 EV of Project 2 = (0.1 × 25,000) + (0.4 × 12,000) + (0.5 × 5,000) = $9,800 EV of Project 3 = (0.1 × 50,000) + (0.4 × 20,000) – (0.5 × 6,000) = $10,000 (Syllabus area C5(b)) (Syllabus area C6(b)) Project 3 would be chosen on the basis of EV without perfect information. With perfect information, this decision would be changed to Project 1 if market research indicates strong demand and Project 2 if market research indicates weak demand. EV with perfect information: (0.1 × 70,000) + (0.4 × 20,000) + (0.5 × 5,000) = $17,500 Value of perfect information = $(17,500 – 10,000) = $7,500 – ignoring the cost of obtaining the informatio