Page 290 - P1 Integrated Workbook STUDENT 2018

Subject P1: Management Accounting

5.8 A prospective new beauty salon is deciding on which of two areas to enter. The
decision is dependent on the expected result of government planning proposals
for new property. There is a 55% probability of Area 1 being chosen for a new
housing development and a 45% of Area 2 being chosen.

If Area 1 is chosen for the new development the beauty salon would make a
profit of $60k if it were to open up in that area, but only make a profit of $20k if it
opens in Area 2.

If Area 2 is chosen for the new development the beauty salon would make a
profit of $80k if it were to open up in that area, but only make a profit of $20k if it
opens in Area 1.

The beauty salon has correctly determined the expected values of the two
areas to be $42k for Area 1 and $47k for Area 2.

What is the maximum the beauty salon would pay for perfect information about
the result of the government’s planning decision?

The maximum amount that the beauty salon would pay for perfect
information about the result of the government’s planning decision is
$_________________

(Your answer should be rounded to the nearest the nearest $)

5.9 A business has produced a summary showing the profit earned, depending on
the future state of the economy, from two possible investment options, A and B:

State of the economy Recession Stability Growth
Probability 60% 30% 10%

Expected profit from A ($) 60,000 80,000 140,000
Expected profit from B ($) 70,000 80,000 120,000
It has determined the expected value for profit to be $74,000 for A and $78,000
for B.

What is the maximum amount that the business should be willing to pay
for perfect information on the state of the economy?

A $2,000

B $3,200

C $4,000

D $6,000

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