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Prajnya.
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- February 23, 2026 at 12:32 am #724829
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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