Reference no: EM132853447

Plans are being made to build another airport in the Lower Mainland. Two possible locations for the new airport, Site A and Site B, have been identified. A final decision regarding the new airport location will not be known for another year.

Magnolia Inns hotel chain hopes to build a hotel near the new airport. Land values around the two potential airport sites are increasing as investors speculate that property values will increase greatly in the vicinity of the new airport. Magnolia Inns wants to purchase the land now, before land prices increase any further.

-The land near Site A will cost Magnolia Inns $18,000,000

-If they purchase the land near Site A and the new airport is built at Site A, they expect a total revenue of $31,000,000 (present value)

-If they purchase the land at Site A and the new airport is built at Site B instead, they will not build the hotel and sell the land. The land will lose its value and they estimate a selling price of $6,000,000 (present value)

-The land near Site B will cost Magnolia Inns $12,000,000 (it's a smaller piece of land and the hotel will have to be smaller)

-If they purchase the land near Site B and the new airport is built at Site B, they expect a total revenue of $23,000,000 (present value)

-If they purchase the land at Site B and the new airport is built at Site A instead, they will not build the hotel and sell the land. The land will lose its value and they estimate a selling price of $4,000,000 (present value)

Question 1: If they purchase the land near Site A and the airport is built at Site A, what is their estimated profit?

Question 2: If they purchase the land near Site A and the airport is NOT built at Site A, what is their estimated profit?

Question 3: If they purchase the land near Site B and the airport is built at Site B, what is their estimated profit?

Question 4: If they purchase the land near Site B and the airport is NOT built at Site B, what is their estimated profit?

It is discovered that there is a 60% probability the airport will be built at Site A; there is a 40% probability the airport will be built at Site B.

Question 5: What is the expected value for purchasing the land near Site A?

Question 6: What is the expected value for purchasing the land near Site B?

Question 7: Which site should Magnolia Inns invest in -- Site A or Site B? Why

-Invest in Site B. The expected profit for investing at Site B is higher than the expected profit for investing at Site A

-Invest in Site A. You will make $3,000,000 if you invest at Site A. If you invest at Site B, you will lose $400,000.

-Invest in Site A. The expected profit for investing at Site A is higher than the expected profit for investing at Site B

-Invest in Site A as the airport is more likely to be built there.Question 8: What is the probability you will make a profit for each project?

Probability investing at Site A will be profitable? %

Probability investing at Site B will be profitable? %