A builder has located a piece of property that she would like to buy and eventua

Question

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 costs, alternatives, and probabilities:

Cost of land: $2 million.

Probability of rezoning: 0.60.

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 percent chance that she can sell the shopping center to a large department store chain for $4 million over her construction cost, which excludes the land; and there is a 30 percent 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 percent 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 percent chance that she can get only $2,000 each over her construction cost. (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).

a. What is the expected value for the rezoned shopping center, if the rezoning cost is included? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)

Expected value            $  million

b. What is the expected value for the rezoned apartments, if the rezoning cost is included? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)

Expected value            $  million

c. If the land is rezoned, what should the contractor decide?

d. What is the expected revenue, if the land is not rezoned?(Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)

Expected revenue            $  million

e. What is the expected net profit of entire project? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)

  Expected net profit            $  million

Please help!!

I got 1.4.3

2.3.9

3.4.6.. But all my Answers are wrong? Please help!

Explanation / Answer

a.What is the expected value for the rezoned shopping center?

EV(1) = 4*0.70 + 5*0.30 = $4.30M

So Rezoing cost is 4.30 -0.6*Rezoing cost=4.30- 0.60*1 = 3.70M

b.What is the expected value for the rezoned apartments?

EV(2) = 1500*3000*0.60/1M + 1500*2000*0.40/1M = $3.90M

So Rezoing cost is 3.90 -0.6*Rezoing cost=3.90- 0.60*1 = 3.30M

c.If the land is rezoned, what must the contractor decide?

Build shopping center as Higher EV of 4.30M

d.What is the expected revenue (excluding the cost of land) associated with buying/developing the property?

EV(No ZOning ie Build homes)= 600*4000/1M= $2.40M

EV (Zoning ie SHopping cneter) = 4.30M

SO EV(buying or devlopint-lighting etc)

= 0.60*(4.30-1) + 0.40*2.40 = $2.94M

Expected value $ million

e.What is the expected net profit (including the cost of land) associated with buying/developing the property?

Expected Value = 2.94 - cost of land 2.0 = 0.94M

Expected value $ million

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