Dante Development Corporation is considering bidding on a contract for a new office building complex. The following figure shows the decision tree prepared by one of Dante’s analysts. At node 1, the company must decide whether to bid on the contract. The cost of preparing the bid is $200,000. The upper branch from node 2 shows that the company has a 0.8 probability of winning the contract if it submits a bid. If the company wins the bid, it will have to pay $2 million to become a partner in the project. Node 3 shows that the company will then consider doing a market research study to forecast demand for the office units prior to beginning construction. The cost of this study is $150,000. Node 4 is a chance node showing the possible outcomes of the market research study. Nodes 5, 6, and 7 are similar in that they are the decision nodes for Dante to either build the office complex or sell the rights in the project to another developer. The decision to build the complex will result in an income of $5 million if demand is high and $3 million if demand is moderate. If Dante chooses to sell its rights in the project to another developer, income from the sale is estimated to be $1.5 million. The probabilities shown at nodes 4, 8, and 9 are based on the projected outcomes of the market research study. Please see attached Image Based on that:  1. Verify Dante’s profit projections shown at the ending branches of the decision tree by calculating the payoffs of $2,650,000, $650,000, and $1,150,000 for the first three outcomes

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Chapter1: Financial Statements And Business Decisions
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Dante Development Corporation is considering bidding on a contract for a new office building complex. The following figure shows the decision tree prepared by one of Dante’s analysts. At node 1, the company must decide whether to bid on the contract. The cost of preparing the bid is $200,000. The upper branch from node 2 shows that the company has a 0.8 probability of winning the contract if it submits a bid. If the company wins the bid, it will have to pay $2 million to become a partner in the project. Node 3 shows that the company will then consider doing a market research study to forecast demand for the office units prior to beginning construction. The cost of this study is $150,000. Node 4 is a chance node showing the possible outcomes of the market research study.
Nodes 5, 6, and 7 are similar in that they are the decision nodes for Dante to either build the office complex or sell the rights in the project to another developer. The decision to build the complex will result in an income of $5 million if demand is high and $3 million if demand is moderate. If Dante chooses to sell its rights in the project to another developer, income from the sale is estimated to be $1.5 million. The probabilities shown at nodes 4, 8, and 9 are based on the projected outcomes of the market research study.

Please see attached Image

Based on that: 

1. Verify Dante’s profit projections shown at the ending branches of the decision tree by calculating the payoffs of $2,650,000, $650,000, and $1,150,000 for the first three outcomes.

This image depicts a decision tree related to a bidding decision-making process for a project, displaying potential profits in thousands of dollars. Below is a detailed explanation of the decision tree components:

1. **Node 1: Initial Decision - Bid or Do Not Bid**
   - **Do Not Bid**: Leads directly to a profit of $0.

2. **Node 2: If Bid**
   - **Win Contract (0.8 probability)**
     - Leads to Node 3.
   - **Lose Contract (0.2 probability)**
     - Results in a loss of $200.

3. **Node 3: Win Contract**
   - Choose between conducting or not conducting market research.
   - **Market Research**: Leads to Node 4.
   - **No Market Research**: Leads to Node 7.

4. **Node 4: Conduct Market Research**
   - **Forecast High (0.6 probability)**
     - Leads to Node 5.
   - **Forecast Moderate (0.4 probability)**
     - Leads to Node 6.

5. **Node 5: Forecast High**
   - **Build Complex**:
     - **High Demand (0.85 probability)**: Results in a profit of $2,650.
     - **Moderate Demand (0.15 probability)**: Results in a profit of $650.
   - **Sell**: Yields a profit of $1,150.

6. **Node 6: Forecast Moderate**
   - **Build Complex**:
     - **High Demand (0.225 probability)**: Yields a profit of $2,650.
     - **Moderate Demand (0.775 probability)**: Yields a profit of $650.
   - **Sell**: Results in a profit of $1,150.

7. **Node 7: No Market Research**
   - **Build Complex**:
     - **High Demand (0.6 probability)**: Leads to a profit of $2,800.
     - **Moderate Demand (0.4 probability)**: Leads to a profit of $800.
   - **Sell**: Yields a profit of $1,300.

This decision tree aids in evaluating the strategic steps (bid or not, conduct market research or not, build or sell) to maximize profit outcomes based on varying probabilities of market demand.
Transcribed Image Text:This image depicts a decision tree related to a bidding decision-making process for a project, displaying potential profits in thousands of dollars. Below is a detailed explanation of the decision tree components: 1. **Node 1: Initial Decision - Bid or Do Not Bid** - **Do Not Bid**: Leads directly to a profit of $0. 2. **Node 2: If Bid** - **Win Contract (0.8 probability)** - Leads to Node 3. - **Lose Contract (0.2 probability)** - Results in a loss of $200. 3. **Node 3: Win Contract** - Choose between conducting or not conducting market research. - **Market Research**: Leads to Node 4. - **No Market Research**: Leads to Node 7. 4. **Node 4: Conduct Market Research** - **Forecast High (0.6 probability)** - Leads to Node 5. - **Forecast Moderate (0.4 probability)** - Leads to Node 6. 5. **Node 5: Forecast High** - **Build Complex**: - **High Demand (0.85 probability)**: Results in a profit of $2,650. - **Moderate Demand (0.15 probability)**: Results in a profit of $650. - **Sell**: Yields a profit of $1,150. 6. **Node 6: Forecast Moderate** - **Build Complex**: - **High Demand (0.225 probability)**: Yields a profit of $2,650. - **Moderate Demand (0.775 probability)**: Yields a profit of $650. - **Sell**: Results in a profit of $1,150. 7. **Node 7: No Market Research** - **Build Complex**: - **High Demand (0.6 probability)**: Leads to a profit of $2,800. - **Moderate Demand (0.4 probability)**: Leads to a profit of $800. - **Sell**: Yields a profit of $1,300. This decision tree aids in evaluating the strategic steps (bid or not, conduct market research or not, build or sell) to maximize profit outcomes based on varying probabilities of market demand.
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