CMA Final · Strategic Cost Management · Decision Making using Probability
A decision tree node offers a launch costing Rs 6 lakh. Success (probability 0.4) brings inflows of Rs 20 lakh; failure brings Rs 4 lakh. What is the expected net value of launching?
The expected net value is Rs 4.4 lakh. Expected inflow is 0.4 times 20 plus 0.6 times 4, which is 10.4 lakh, and deducting the launch cost of Rs 6 lakh leaves 4.4 lakh. Forgetting the cost gives 10.4 lakh.
- ARs 4.4 lakhCorrect
- BRs 10.4 lakh
- CRs 2.4 lakh
- DRs 5.6 lakh
Explanation
Expected inflow = 0.4x20 + 0.6x4 = 8 + 2.4 = 10.4 lakh. Net of cost 6 lakh gives 4.4 lakh. Rs 10.4 lakh ignores the cost.
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