CMA Intermediate · Management Accounting · Decision Theory
Under a decision with EMV of the best action Rs. 46 lakh and expected payoff under perfect information Rs. 52.5 lakh, what is the EVPI, and what does it represent?
EVPI equals EPPI minus the best EMV, here 52.5 minus 46 = Rs. 6.5 lakh. It is the maximum amount worth paying for perfect information, since paying more would exceed the expected gain.
- ARs. 6.5 lakh; the maximum a firm should pay for a perfect forecastCorrect
- BRs. 6.5 lakh; the minimum fee a forecaster would charge
- CRs. 98.5 lakh; the total value of the project
- DRs. 46 lakh; the value of the best action
Explanation
EVPI = EPPI - best EMV = 52.5 - 46 = 6.5 lakh. It is the upper limit on what is worth paying for perfect information. Option B misstates its meaning, and C adds instead of subtracting.
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