What is the expected value for the paint ball option

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Reference no: EM132295061

Sally from Sally's Extreme Sports would like to expand her business venture. She has found a piece of land that she would like to buy and eventually create an extreme sports destination on. The land is currently zoned for residential home use and therefore she would have to pursue new zoning to build her sports experience. IF, she can get rezoned, she will have to decide between a few options as to what to build and what to do with it. HOWEVER, if she can't get rezoned, she has no problem with hiring a contractor to build a few homes as well. But she needs to know if the entire project is worth pursuing or not.

Create a decision tree to help you answer the questions that follow.

Cost of Land: $1.5 Million

Probability of rezoning 0.65

If the rezoning occurs, she will have additional costs of $.5 Million

If the rezoning does not occur and she builds houses, she will have an additional cost of $.75 Million

If the land is rezoned, Sally must decide between an building an Extreme Motorcross Track or an Ultimate Paint Ball Zone. If she builds the Track, there is a 70% chance she can sell it to an company from Singapore for $5 Million over her construction costs (excluding the land). She has a 2nd potential buyer lined up that would pay a little less, at $2 Million over her costs.

If instead of the track, she builds the paint ball zone she has one buyer lined up, and estimates the sale to profit her as follows: 50% chance on the high side of selling for $3.86 Million over her construction costs (excluding the land) or the on the low side only getting $2.5 Million.

If the land is not rezoned, she will build 625 homes, with an expectation of $4100 each over the construction cost (excluding the land).

What is the expected value for the rezoned Extreme Motorcross Option?

What is the expected value for the paint ball option?

If the rezoning occurs, which project should Sally pursue?

What is the expected revenue if the land is not rezoned?

What is the expected net profit of the entire project? Remember her to finally subtract the original land cost.

Reference no: EM132295061

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