Happy Chicks is a commercial poultry farm situated in the south of England, which rears day-old White Leghorn chicks for egg farmers. The chicks are reared in large free-range barns until the age of 22 weeks, when they are sold to egg farmers as egg-laying pullets. After rearing a batch of chicks, the poultry barns are disinfected and allowed to lie empty for 4 weeks. If this cycle is not followed, infectious poultry diseases are more likely to occur. So, Happy Chicks’ barns are stocked with birds for 22 weeks per half-years, and lie empty for a further 4 weeks per half-year.

Despite these precautions, chicks are liable to die from a number of causes. A small number of day-old chicks die soon after being introduced into the barns, while a certain number will also contract infectious diseases and die. (Happy Chicks does inoculate its birds against known poultry diseases, but new strains of viruses appear in certain years, resulting in bird deaths). Chickens are also highly nervous creatures, and can be frightened by sudden loud noises. When this happens the birds often rush to the side of the barn furthest from the noise, and many can be crushed to death in this process.

At the beginning of each 22-week cycle, Happy Chicks buys 105,263 day-old chicks at £1.00 each and places them into the barns. On average, about 5% of these chicks (5,263 chicks) are found dead by the end of Day 1 and are disposed of. Apart from their purchase cost, these chicks are not considered to have incurred any other costs at this stage, i.e. food, heating or medication costs.

Of the remainder, some will die of crushing, some will die of miscellaneous causes (such as cannibalism) and some may also die from new infectious diseases. Although deaths occur at various stages during the 22 weeks, the average age of all birds which die is 11 weeks. It costs £0.25 per week to raise each bird (this includes food, medication and gas heating). Fixed costs for each 22-week period amount to £80,000. Birds which die from crushing and miscellaneous causes are sold to a local pet food company for £1.00 each, while birds which die from disease are disposed of. (The cost of disposing of diseased birds and dead day-old birds is included in fixed costs). Pullets are sold for £8.50 each when they reach the Point of Lay stage, i.e. at 22 weeks of age. Fixed costs during each 4-week disinfection period amount to £10,000.

Chris Fowler is the CEO of FreshLaid plc, a giant UK egg producer. He has been approached by the owners of Happy Chicks and has been asked to make an offer for the business. Chris has decided that he will buy the Happy Chicks business if the expected value of annual profits (based on the information mentioned above, and on further details per each of the scenarios below) equals or exceeds £50,000, as this will provide him with a satisfactory return on his invested capital. Chris has determined that there are three likely scenarios for the Happy Chicks farm for the next year. They are: (Note that percentages of birds dying as quoted below apply to the 100,000 live chicks which start each 22-week cycle).

Scenario 1: 5% of birds will die from crushing, 5% from miscellaneous causes, and there will be no deaths from disease – 25% chance of occurrence.

Scenario 2: 5% of birds will die from crushing, 10% from miscellaneous causes, and there will be no deaths from disease – 35% chance of occurrence

Scenario 3: 5% of birds will die from crushing, 10% from miscellaneous causes, and 10% from disease – 40% chance of occurrence.

Required:

1. Advise Chris Fowler if the EV of profits of Happy Chicks for a year of operations meets his target. Note that you should provide detailed workings to support your answer.

b)

(i) If Chris Fowler could pay a consultant for perfect information, what type of information is he likely to be most interested in? (ii) Furthermore, how could Chris decide if the price quoted for perfect information was a fair price?

(iii) And finally, if the price of perfect information was fair, would Chris definitely be better off if he purchased the perfect information. Briefly explain your answer.