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: Cost of land: $3 million. Probability of rezoning: 0.50. If the land is rezoned, there will be additional costs for new roads, lighting, and so on, of $1 million. If the land is rezoned, the contractor must decide whether to build a shopping center or 1,400 apartments that the tentative plan shows would be possible. If she builds a shopping center, there is a 50 percent chance that she can sell the shopping center to a large department store chain for $6 million over her construction cost, which excludes the land; and there is a 50 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 1,400 apartments, she places probabilities on the profits as follows: There is a 50 percent chance that she can sell the apartments to a real estate investment corporation for $2,800 each over her construction cost; there is a 50 percent chance that she can get only $2,300 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 $3,800 over the construction cost on each one (excluding the cost of land). a. What is the expected value for the rezoned shopping center, if the rezoning cost is included (but land cost is excluded)? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.) Expected value million
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: Cost of land: $3 million. Probability of rezoning: 0.50. If the land is rezoned, there will be additional costs for new roads, lighting, and so on, of $1 million. If the land is rezoned, the contractor must decide whether to build a shopping center or 1,400 apartments that the tentative plan shows would be possible. If she builds a shopping center, there is a 50 percent chance that she can sell the shopping center to a large department store chain for $6 million over her construction cost, which excludes the land; and there is a 50 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 1,400 apartments, she places probabilities on the profits as follows: There is a 50 percent chance that she can sell the apartments to a real estate investment corporation for $2,800 each over her construction cost; there is a 50 percent chance that she can get only $2,300 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 $3,800 over the construction cost on each one (excluding the cost of land). a. What is the expected value for the rezoned shopping center, if the rezoning cost is included (but land cost is excluded)? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.) Expected value million
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
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Transcribed Image Text:b. What is the expected value for the rezoned apartments, if the rezoning cost is included (but land cost is excluded)? (Do not round
your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated
by a minus sign.)
Expected value
million
c. If the land is rezoned, what should the contractor decide?
Build shopping center
Build apartments
d. What is the expected revenue, if the land is not rezoned (excluding the land cost)? (Do not round your intermediate calculations.
Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)
Expected value
million
e. What is the expected net profit of entire project, including all applicable costs? (Do not round your intermediate calculations. Enter
your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)
Expected value
million
Thie in0
Transcribed Image Text: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:
Cost of land: $3 million.
Probability of rezoning: 0.50.
If the land is rezoned, there will be additional costs for new roads, lighting, and so on, of $1 million.
If the land is rezoned, the contractor must decide whether to build a shopping center or 1,400 apartments that the tentative plan
shows would be possible. If she builds a shopping center, there is a 50 percent chance that she can sell the shopping center to a large
department store chain for $6 million over her construction cost, which excludes the land; and there is a 50 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 1,400 apartments, she places probabilities on the profits as follows: There is a 50 percent chance that she can
sell the apartments to a real estate investment corporation for $2,800 each over her construction cost; there is a 50 percent chance
that she can get only $2,300 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 $3,800 over the construction cost on each one (excluding the cost of land).
a. What is the expected value for the rezoned shopping center, if the rezoning cost is included (but land cost is excluded)? (Do not
round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be
indicated by a minus sign.)
Expected value
million
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