3) You have completed bidding for a new bridge project that will need 3 years to

Question

3) You have completed bidding for a new bridge project that will need 3 years to complete. Your company wants to know a range of possible outcomes in terms of net present worth of this project. Your company uses an interest rate of 7% to evaluate construction projects. As you may know, there are uncertainties associated with estimating the initial construction cost and the net annual revenue, which can be best presented in the table below. Initial Probability Annual Revenue Probability (Annual Construction Cost (Initial Cost) Revenue 1,000,000 200,000 0.5 0.3 1,600,000 310,000 0.2 0.2 900,000 270,000 0.3 0.5 a) What are the optimistic (OP), Most Likely (ML), and Pessimistic (PE) scenarios and the probability of each occurring?

Explanation / Answer

If initial cost is 1,000,000 then probability for annual revenue

1) 200,000 is = 0.5 * 0.3 = 0.15

2)  310,000 is = 0.5 * 0.2 = 0.10

3) 270,000 is = 0.5 * 0.5 = 0.25

If initial cost is 1,600,000 then probability for annual revenue

1) 200,000 is = 0.2 * 0.3 = 0.06

2)  310,000 is = 0.2 * 0.2 = 0.04

3) 270,000 is = 0.2 * 0.5 = 0.10

If initial cost is 900,000 then probability for annual revenue

1) 200,000 is = 0.3 * 0.3 = 0.09

2)  310,000 is = 0.3 * 0.2 = 0.06

3) 270,000 is = 0.3 * 0.5 = 0.15

Most optimistic solution is when initial construction cost is 900,000 and annual revenue is 310,000. The probability of this happening is 0.06

Most pessimistic solution is when initial construction cost is 1,600,000 and annual revenue is 200,000. The probability of this happening is 0.06

Most likely solution is when initial construction cost is 1,000,000 and annual revenue is 270,000. The probability of this happening is 0.25

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