ExpertHard2 marksMultiple Choice
ACCA · Question 24 · Decision-making techniques
Section B - Case 2: CyberShield
CyberShield is a tech startup developing a new B2B SaaS (Software as a Service) platform for cybersecurity.
Assume the probabilities of competitor reaction are: Weak (0.6) and Strong (0.4).
Expected Value (EV) of Aggressive = (5000.6) + (-1000.4) = 260
EV of Moderate = (3000.6) + (1000.4) = 220
EV of Conservative = (1500.6) + (1200.4) = 138
A market research firm offers to find out exactly what the competitor will do. What is the Expected Value of Perfect Information (EVPI)?
Section B - Case 2: CyberShield
CyberShield is a tech startup developing a new B2B SaaS (Software as a Service) platform for cybersecurity.
Assume the probabilities of competitor reaction are: Weak (0.6) and Strong (0.4).
Expected Value (EV) of Aggressive = (5000.6) + (-1000.4) = 260
EV of Moderate = (3000.6) + (1000.4) = 220
EV of Conservative = (1500.6) + (1200.4) = 138
A market research firm offers to find out exactly what the competitor will do. What is the Expected Value of Perfect Information (EVPI)?
Answer options:
A.
$260,000
B.
$340,000
C.
$80,000
D.
$88,000
How to approach this question
1. Calculate EV with perfect information: For each state of nature, pick the best outcome and multiply by its probability. Sum these up. 2. Subtract the best EV without perfect information (260).
Full Answer
D.$88,000✓ Correct
1. EV with perfect information:
If reaction is Weak (prob 0.6), best choice is Aggressive ($500k).
If reaction is Strong (prob 0.4), best choice is Conservative ($120k).
EV with perfect info = (500 * 0.6) + (120 * 0.4) = 300 + 48 = 348.
2. EV without perfect information = 260 (the highest EV of the three strategies).
3. EVPI = EV with perfect info - EV without perfect info = 348 - 260 = 88 ($88,000).
Common mistakes
Forgetting to subtract the EV without perfect information, or picking the wrong 'best' option for the Strong reaction.
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