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Dear Sir, Good evening!
I am sorry, I have posted my query in the forum by chance, so I had to copy here for your attention.
Asking for your kind assistance.
I am reviewing this question, and I am confused with part B.
The examiner answered the requirement for calculation the maximum price the GB should pay for perfect information about expansion’s exact effect of Membership numbers.
The answer is.
If memeberhip numbers were 6000:
EV-3.42m*3=10.26
Less costs of 360k=9.9mIn this instance, GB would choose option 1(3*3.36)=10.08m
Why $10.08 is chosen?If membership numbers were 6500:
EV=3.705*3=11.115m
Less costs of 360k=10.755mIn this case, GB will choose option 2
So, if membership numbers are 6000, of which there is a 0.4probability, EV will be 10.08(option1) and if membership numbers are 6500, of which there is a 0.6probability, then EV will be 10.755m(option2)
Therefore, the EV with PERFECT INFO=(0.4*10.08)+(0.6*10.755)=10.485.
I do not understand why EV $10.08 is selected for 6000 members, and not 9.9, calculated. as
EV-3.42m*3=10.26
Less costs of 360k=9.9m.
Thank you very much!It is because if we have paid for the perfect information, then we will know with certainty what the outcome will be.
If we are told that there will be 6000 members, then there will definitely be 6000 members – so we will choose the best option.
Similarly if we are told that there will be 6500 member then there will definitely be 6500 member – it will not longer be uncertain.Hi, don’t know if I should ask on here or start a new question but on gym bunnies I have no idea how the 10-413million is calculated at point d or the 3.591 at point c or the 3.42 at point a or the 3.705 at point b, I have tried all scenerios and just can’t come to the same figures the. I understand the rest of the question using these figures just don’t get where these figured are coming from?
Sorry if I should have started my own topic.
Thanks
Mo
hello sir, i do not understand where the $10.431m is coming from and the other values. kindly assist me to understand.
Thank youAt each point we are calculating the expected value of the outcomes.
So at Point A for example, the outcomes are either 3.6M per year or 3.24M per year, each with a 0.5 probability.
Therefore the expected value is (3.6 x 0.5) + (3.24 x 0.5) = 3.42M per year.I suggest that you watch my free lectures on expected values and decision trees.
The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
Hello Sir
The same question, they have mentioned that operational costs are to stay at their current level of 80 per member per annum.
I do not understand why we are subtracted 80 from the subscription fee of 720
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