Page 305 - P1 Integrated Workbook STUDENT 2018

Answers to supplementary objective test questions

5.8 The answer is $22,000.

Without perfect information, the best option for the shop owner is to open in
Area 2 and earn an expected value of $47k.

With the perfect information, if the beauty salon knows that Area 1 will get the
planning permission then it will open in that area and earn $60k; if the beauty
salon knows that Area 2 will get the planning permission then it will open in that
area and earn $80k. As the probabilities are 55% that Area 1 receives the
planning and 45% for Area 2, the expected value is now calculated as:

(0.55 × $60k) + (0.45 × $80k) = $69k, $2k more than before. This is the
maximum that the beauty salon should be prepared to pay for the information.

5.9 A

With perfect information, the business would invest in B if the forecast is for a
recession and A if the forecast is for growth. This would give an expected value
of = (0.6 × $70,000) + (0.3 × $80,000) +(0.1 × $140,000) = $80,000.

When compared to the maximum EV without the information ($78,000), the
value of the information is $2,000.

5.10 The answer is 392,000 units.

There will be 3 weeks with sales of 100,000 units. In the other week, sales will
be = (60% × 100,000) + (40% × 80,000) = 92,000.

Total estimated sales for the 4 week period = (3 × 100,000) + 92,000 = 392,000
units.

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