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Value of Information

Valueof Information

Valueof Information

Decisionmaking is a mental process of choosing from a group of alternatives.It is the selection of the best outcome from a set of alternativesthat may not differ much or may differ extensively. In our case, ouralternatives are a Real Estate project and a business venture JustHat’s. there is also the added advantage of the expert informationabout the state of nature to expect and the probabilities of theiroccurrence in both investment project industries. This information isthe basis of our analysis. The information offers the comparison ofwhether there would be either favourable or unfavourable conditionsin the real estate market and the business venture and combines thetwo industries to offer a glimpse of the future.

theexpert’s information while not always accurate has a proven trackrecord. It is the value of his information that is our purpose. Is itworth to pay for it? Should we base our judgment on it? These are thefundamental questions that need to be answered.

Asis seen on the column under the EMV (Expected Monetary Value),without the expert information, in every project we undertake theoutcome is less than projects undertaken with the expert’sinformation. The expert’s information predicts favourable states ofnature more reliably than it does unfavourable states of nature. Ineach of his unfavourable predictions, the returns are lower in casesof favourable states of nature for the real estate industry and forthe business venture. With his information the investment would standto lose more money than they would have lost without his information.All this is if the expert’s prediction of favourable states ofnature for both the real estate and the business venture.

Inthe event the expert predicts an unfavourable state of nature forboth the real estate and the business venture, the returns if theoutcome is favourable is far below returns without his information.If the outcome is indeed unfavourable, the returns are greater thanwithout his information. In the event that the real estate projectexperiences a favourable state while the business venture has anunfavourable nature, the returns with the expert information aregreater than without based on his state of nature prediction. In theevent that the expert predicts an unfavourable state for real estateand favourable for the business venture, the return on the respectivestates are greater than without his information.

Thereare a few assumptions in mind with regard to the analysis made withregard to the information of the expert. The first assumption is thatthe state of nature actually occurs in the probabilities predicted.In the chance that an investment made with the eye on the possibilityof a favourable-favourable state of nature, there is the chance thatthis might not happen. The other assumption is based on thereliability of the expert’s information. No single person has theknowledge nor expertise to be able to provide information on statesof nature on not one but two different projects in differentindustries and be accurate at every single turn. Our assumption isthat the expert is correct.

Theconcept behind every single business idea is the creation of wealth.That is the maximisation of profit in comparison to cost. In ourcase, it is wise to use the expert information bearing in mind theassumptions. These is because, if the information provided proves tobe true, the returns that stand to be made greatly outweigh the risktaken. In every single instance that the expert’s informationproves true, there is a significant increase in the Expected MonetaryValue. Therefore, for us to be satisfying our core reason tobusiness, that is the maximisation of wealth profit, the expertinformation comes in handy.

Inour case, the information provided by the expert may prove valuable.This is because it tells us of the outcomes to expect and theprobabilities that go along with each state of nature. Theassumptions used are the expert’s predictions on the states ofnature.

Itis my recommendation in accordance with the decision tree, that thecompany should invest in the real estate market. This is because ofthe great returns that they will experience as compared to the otheralternatives. The bond market though risk free, is not suitable forthe investment as the opportunity cost is the expected return for thereal estate market less the return from the bond market. This tooapplies to the Just Hats venture.

Thisdecision is best for the firm irrespective of the expert’sinformation or not. In the chance that the real estate projectexperiences favourable returns, the returns are greater than in anyother project. The returns if the project experiences an unfavourablestate of nature though lower than for the Just Hat’s venture andthe 10-year bond, are a good return. The difference betweenfavourable and unfavourable for real estate and the rest with orwithout the expert information are great. For this reason, it is myrecommendation that we invest in the expert information and if not,we invest in the real estate project.

Reference

Langfield-Smith,K., Thorne, H., &amp Hilton, R. W. (2008). Managementaccounting: Information for creating value. NewYork: Macmillan Publishers.