Risk and Uncertainty — OpenTuition Forums

SSaanika8y ago

Dear Mr. Moffat, This is in regard to question number 43 ( Gym Bunnies) of the F5 practice text book from 1 September 2015 to 31 August 2016 Part (a) of the question asks for a decision tree for the two options:- Option 1:- No expansion required in which case the expected value is 5250 members x $640x 3 years = $10.08m Option 2:- Expand the studio and the capital cost of this would be $360,000; and the expected value is ($3.591- $.360) x 3 years = $ 9.693m After solving the decision tree, I came to the conclusion:- Option 1:- $10.08m Option 2:- $9.693m; but according to the text book the answer reads $10.413m. I tried redoing the decision tree and recalculated it and came back to $9.693m. SO of course according to the textbook the answer is option 2; to expand the studio. But my calculations bring the answer to option 1; not to expand. Could you tell me which is the correct answer and if the text book is right, where might I be going wrong. I would be happy to provide you with all my calculations if required. Thank you.

John MoffatTutor8y ago#1

I am sorry for not replying earlier - I check for questions twice a day, but somehow I must have missed this one :-( I do not know which book you are referring to (I only have the current edition of the BPP Revision Kit, which does not include this question - probably because (as you will know if you have watched my lectures) you can no longer be asked to actually draw a decision tree even though you can be tested that you understand them). However this was a past exam question (in the days when you could be asked to draw a tree) and so I do have the question and the answer is indeed correct. Your mistake is that the capital cost of 360,000 is only payable once - not each year. Therefore the expected value is (3.591 x 3) - .360 = 10.413

SSaanika8y ago#2

Thanks a bunch sir!

John MoffatTutor8y ago#3

You are welcome :-)

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