Hawk Development Corporation purchased land that will be the site of a new luxur

Question

Hawk Development Corporation purchased land that will be the site of a new luxury condominium complex. The location provides a spectacular view of the CT river and is near a golf course and within easy driving distance of the airport and downtown Hartford. The company is considering three different sized projects: one with 30 condos, one with 60 condos, and one with 90 condos. The financial success of the project depends on the future demand of condos in the area. Hawk Development Corporation has to make a decision about which is the best size for their new condo complex. While they do not know what the demand will be, they can estimate what the financial payouts for the different sizes will be, based on their previous experience building other condominium complexes. This table includes their estimates of how much money they will make for each of the three sized projects, depending on whether or not there will be a STRONG demand for condos or a WEAK demand for condos. So, for example, if the market for condos is hot, they estimate they can make 20 Million dollars if they build 90 condos, but if the market tanks, they will lose 9 Million dollars. They also estimate that there is an 80% chance that the market will be strong and a 20% chance that it will be weak. Calculate the expected value of each possibility and determine which of the three sizes will bring in the most profit. (Multiple each value by the probability, and then add the two values for each size complex together). Payoff Table for the Hawk Condo Development Project Demand for new Condos Strong 8 Million7 Million 4 Million5 Million 20 Million Million Weak Size of Condo Development Small (30) Medium (60) Large (90)

Explanation / Answer

Please see below the table showing the expected value: -

Based on this, Large project should be considered as it has the highest expected value (14.2).

Strong (0.8) Weak (0.2) Expected Value Small (30) 6.4 1.4 7.8 Medium (60) 11.2 1 12.2 Large (90) 16 -1.8 14.2

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