Sketch a decision tree of the problem find out the best

Assignment Help Finance Basics

Reference no: EM13477112

A builder has located a piece of property that she would like to buy and eventually build on. The land is currently zoned for four homes per acre, but she is planning to request new zoning. What she builds depends on approval of zoning requests and your analysis of this problem to advise her. With her input and your help, the decision process has been reduced to the following cost, alternatives, and probabilities.

• Cost of land: $2 million.
• Probability of rezoning: 60%
• If the land is rezoned, there will be additional costs for new roads, lighting, and so on, of $1 million.

If the land is rezoned, the contractor must decide whether to build a shopping center or 1,500 apartments that the tentative plan shows would be possible. If she builds a shopping center, there is a 70% chance that she can sell the shopping center to a large department chain for $4 million over her construction cost, which excludes the land; and there is a 30% chance that she can sell it to an insurance company for $5 million over her construction cost (also excluding the land). If, instead of the shopping center, she decides to build the 1,500 apartments, she places probabilities on the profits as follows: There is a 60% chance that she can sell the apartments to a real estate investment corporation for $3,000 each over her construction cost; there is a 40% chance that she can get only $2,000 each over her construction costs. (Both exclude the land cost.)

If the land is not rezoned, she will comply with the existing zoning restrictions and simply build 600 homes, on which she expects to make $4,000 over the construction cost on each one (excluding the cost of land).

Draw a decision tree of the problem. Determine the best solution. What is the expected value of the entire project?

Reference no: EM13477112

Questions Cloud

By using standard deviation and beta measures of risk you : you have been asked to analyse grand plomp ltd a maker of rocket widgets used by nasa.the owners are wondering whether

Compute the annualized geometric and arithmetic returns : sally is reviewing the performance of several portfolios in the family trusts. trust a is managed by wall street

Choose an existing business that is dealing with or has : select an existing business that is dealing with or has recently dealt with a negative public relations situation

List and explain the three components of organizational : q.1 compare and contrast leader ship and management.q.2 contrast an effective and ineffective leader using the concepts

Sketch a decision tree of the problem find out the best : a builder has located a piece of property that she would like to buy and eventually build on. the land is currently

Create a decision tree to help expando make the best : expando inc. is considering the possibility of building an additional factory that would produce a new addition to its

Costs break-even financial planning and budgeting this week : costs break-even financial planning and budgetingthis week we will focus on the financial information for your business

Please prepare a description of the marketing and : marketing and competitive strategyplease prepare a description of the marketing and competitive strategy for the

Select an existing business that utilizes short medium and : select an existing business that utilizes short medium and long-term strategic planning. you may also use your own

User Account

All Pages