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Hello
in Q Sweet Cicely part b
I understand what opportunity cost is beeing the lost benefits of not choosing another option however im stuck with this question.
with the 50 million demand how can we talk of opportunity cost when the alternative gives you a loss of (8).
Or am i to understand it as such.
Should the option 1 with 50 million demand fail to give me +4 i would’ve made a loss of 8 and therefore a difference of 12
Should the option 2 with 60 million demand fail to give me 16 positive NPV I would’ve either made a gain of 6, therefore, a difference of 10 or a loss of 24, therefore, a difference of 40.
But can that difference really be called opportunity cost or regret?thank you
You’ll need to tell me where this question is from. I am travelling for a couple of weeks so have no access to BPP or Kaplan revision kits. If it an ex exam question I might be able to find it on line.
So, unless the BPP book gives an exam reference for this question, I can’t help for 2 weeks or so as I,am away.
Sorry.
Im sorry I just realized that I hadn’t replied to your question, the exam date was Sept/Dec 2017)
Enjoy your vacation!
The table shows the projected NPVs for all nine possible outcomes.
The secret of minimax regret is in it’s name. To regret something you know the outcome and eish you had done something else. Eg, “I wish I had’t done that course at college and instead studied engineering”.
So, here, we know the level of demand and for each can ddcide if we regret our choice.
For low demand, the top row shows the outcomes and Opt 1 is the best outcome of 4. Had we chosen that, we would have no regrets. Had we chosen Opt 2, we would gave made a loss of 8, down 12 (ie 4 + 8) on what might have been, so our regret is 12. Opt 3 gives a regret of 4 + 32 = 36.
Similarly with the other rows. Find the best (regret = 0) and compare the other results to that.
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