5. What is the expected value of building a small complex when no market research is done (a) $524, 000 (b) $564, 000 (c) $436, 680 (d) $376,000 (e) $436,000
A development corporation purchased land that will be the site of a new luxury condominium complex. Management is considering a six month market research study designed to learn more about potential market acceptance of the condominium project. Management anticipates that, if conducted, the market research study will provide one of the following two results.
1. Favorable report (F): A significant number of the individuals contacted express interest in purchasing a condominium.
2. Unfavorable report (U): Very few of the individuals contacted express interest in purchasing a condo- minium.
After deciding whether to conduct the market research study, they have the following two decision alternatives.
d1 = a small complex with 30 condominiums
d2 = a medium complex with 60 condominiums
Following this, a chance
s2 = weak demand for the condominiums
The payoffs, probabilities, and decision tree associated with this problem are given on the next page.
Note that payoffs are given in thousands of dollars.
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