So I am good with Decision trees, but I have 5 problems just like this (Difficul

Question

So I am good with Decision trees, but I have 5 problems just like this (Difficulty), so I won't be able to finish it with my homework and exams for other lectures. All I need are answers, I just don't have time to draw out the decision trees, figure out the probabilities, and complete all my other work. Thanks

Problem 4-6

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:

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).

What is the expected value for the rezoned shopping center? (Enter your answer in millions rounded to 2 decimal places.)

What is the expected value for the rezoned apartments? (Enter your answer in millions rounded to 2 decimal places.)

What is the expected revenue (excluding the cost of land) associated with buying/developing the property? (Enter your answer in millions rounded to 2 decimal places.)

What is the expected net profit (including the cost of land) associated with buying/developing the property? (Enter your answer in millions rounded to 2 decimal places.)

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:

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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