Calculation and decisions for higher payoff: (0.7*120,000) +0.3 40,000AED 96,000

Question

Calculation and decisions for higher payoff: (0.7*120,000) +0.3 40,000AED 96,000 EV @ B EV @ F (Option# 2) EV @ G (Option# 3) EV @ D EV @ E EV @ C | ( 0.8" 200,000 ) + ( 0.2*60,000 ) | ( 0.4* 180,000 ) + ( 0.6*20,000 ) -AED 172,000 |-AED 84,000 EV @ F EV @ G (0.7*EV@D)+ (0.3* EV@E) - (0.7 172,000)(0.3 84,000) AED 172,000 AED 84,000 AED 145,600 AED 145,600 EV @ A ( Option# 1) | EV @ C Final Decision Tree AED 96.000 AED 120.000 Economv grows ((0.7) No growth (0.3) (0.8) AED172.000 grows AED 40.000 AED 200.000 Option# 2 Build home AED 145.600 No growth(0.2) Sell Land ci AED 60.000 AED 172.000 AED 60.000 No growth (0.3) AED 180.000 AED 145.600 Option# 3 Develop Land No growth (0.6) AED 84.000 AED 84.000 ell Land AED 20.000 AED 20.000 Decision tree Recommendation So, since option purchase land (node C) has better payoff, so at decision (node A) we will select option#1-(node C) Moving forward outcomes of option (node C) are decision (node D and E) At decision (node D) we will select building the house option#2. (node F) At decision (node E) we will select the option#3 ofdeveloping the land-(n0de G) o

Explanation / Answer

Sensitivity analysis at node F and G

At decision node D, there are two options - 1) Build home (F) or, 2) Sell land

Payoff of Sell land is AED 60,000 and the minimum payoff of Build home is AED 60,000 (in case of no growth). Therefore, irrespective of probability of economic growth, Build home (F) remains the best decision.

At decision node E, there are two options - 1) Develop land (G) or, 2) Sell land

Payoff of Sell land is AED 20,000 and the minimum payoff of Develop land is AED 20,000 (in case of no growth). Therefore, irrespective of probability of economic growth, Develop land (G) remains the best decision.

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