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[Example]
A company wishes to go ahead with one of three mutually exclusive projects but the profit outcome from each project will depend on the strength of sales demand as follows:Demand——-Strong–Moderate–Weak
Project 1——70,000—10,000—-(7000)
Project 2——25,000—12,000—–5000
Project 3——50,000—20,000—-(6000)
Probability——0.1———0.4——–0.5[Answer]
Perfect information calculation:Demand—-Best Outcome—Probability—EV
Strong———-70,000————-0.1——–7000
Moderate——20,000————-0.4——–8000
Weak————5,000————–0.5——–2500
EV with Perfect information—————$17,500Imperfect information calculation:
Demand—-Best Outcome—Probability—EV
Strong———-25,000————–0.1——–2500
Moderate——10,000————–0.4——–4000
Weak———–(7,000)————–0.5——–3500
EV with Imperfect information————-$10,500Did I calculate Perfect & imperfect information correctly?
Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers and explanations.
Your EV with perfect information is correct.
There is not enough information in the question to be able to calculate the expected value with imperfect information. You need the probabilities of the information being correct, as in the example in my free lectures (which because it would involve having a decision three makes it much less likely that calculations would be asked in the exam).
Sorry, but could you please state how to calculate EV with imperfect information because I am unable to understand that?
There is a past question Mylo Co (Sept 2016) question (Q19) where we are told to calculate the maximum amount which Mylo would be willing to pay for this information.
I assume that expected value without perfect information is actually imperfect information which is calculated like this:
$191.25 = $1,839·50 – $1,648·25
Imperfect Information = EV with Perfect information – normal EVIs it correct now?
Thanks for the answer by the way 🙂
Mylo has nothing to do with imperfect information.
It asks what the most they will be prepared to pay for perfect information, which is the difference between the expected value with perfect information and the expected value with no information at all. It is just like the example I work through in my lectures to calculate the most to pay for perfect information.
Thanks for clearing that 🙂 that was really helpful….
In the technical article, the examiner states that the calculation of imperfect information is rather complex but I don’t know whether it will be tested in paper PM or not?
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