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- This topic has 6 replies, 2 voices, and was last updated 3 years ago by John Moffat.
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- March 27, 2020 at 4:31 am #565977
Hi,
If the question ask us to calculate the expected value at point A, do we need to minus the cost of making a decision at point B to arrive at the expected value at point A or we just need to multiply the probability to get the expected value?
In some of the questions which I have done, they deducted the cost while some they don’t deduct.
Sorry, it’s hard to explain the question without the picture of the diagram so it might sound confusing.
Eg:
Point A (outcome)
High 90% $580000
Low 10% $240000Expected value which I have calculated
= $546000Point B (decision)
Invest ($40000) *connecting line to Point A*
Outsource $240000 *connecting line to Point A*Do I need to deduct $40000 (cost of investing) from $546000 to get the expected value at point A on the decision trees?
March 27, 2020 at 4:38 am #565979The answer given is $506000 (they deducted it). The other question which I have done, they don’t. I don’t understand why.
March 27, 2020 at 9:21 am #565983It doesn’t matter whether you subtract the cost then or later.
Subtracting the cost is only relevant in deciding which of the alternatives is better.
March 29, 2020 at 2:34 am #566070Thank you so much!
The question also says:
“The profit outcomes do not include the cost of any investments made.”
Does it mean anything or it is not relevant?
The question asks to calculate:
“What is the expected value at point A on the decision trees?”March 29, 2020 at 9:06 am #566081The decision will be based on the net outcome, i.e. the profits less the cost of the investment.
Without seeing the tree, the value at point A is likely to be the net outcome.
March 29, 2020 at 10:02 pm #566116Thanks.
March 30, 2020 at 8:28 am #566136You are welcome 🙂
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