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Decision Making F5 (HELP!)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Decision Making F5 (HELP!)

  • This topic has 4 replies, 4 voices, and was last updated 4 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • December 8, 2015 at 2:39 pm #289015
    Erica
    Member
    • Topics: 16
    • Replies: 33
    • ☆

    Sir, here’s a question :

    Darwin uses decision tree analysis in order to evaluate potential projects. The company has been looking at the launch of a new product which it believes has a 70% profitability of success. The company is, however, considering undertaking an advertising campaign costing $50,000, which would increase the profitability of success to 95%.

    If successful the product would generate income of $200,000 otherwise $70,000 would be received.

    What is the maximum that the company would be prepared to pay for the advertising? (The answer is $32,500 but how?)

    June 23, 2020 at 5:38 pm #574568
    allweshan64
    Member
    • Topics: 1
    • Replies: 1
    • ☆

    Someone explain how they got this please

    June 24, 2020 at 9:53 am #574595
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    Without the advertising the expected profit is (0.70 x 200,000) + (0.3 x 70,000) = $161,000

    With the advertising the expected profit is (0.95 x 200,000) + (0.05 x 70,000) = $193,500

    Therefore the most they will pay for advertising is 193,500 – 161,000 = $32,500.

    Have you watched my free lectures on this? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.

    July 22, 2020 at 5:16 am #577600
    Anonymous
    Inactive
    • Topics: 0
    • Replies: 1
    • ☆

    Sir,may I know why we didn’t take into account the cost of $500000?

    July 22, 2020 at 7:39 am #577614
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    There is no mention of $500,000 in the question.

    I assume that you are referring to the advertising cost of $50,000. It is not relevant because the question asks what is the maximum that they would be prepared to pay for the advertising. The most is is worth paying is $32,500 (and therefore it is not sensible for them to pay $50,000 – it is only worth undertaking the advertising campaign if the cost was less than $32,500).

    Have you watched my free lectures on calculating the benefit of perfect knowledge?

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