Determine the EMV for the problem and identify the best decision.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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  1. A real estate developer must decide on a plan for developing a certain piece of property. After careful consideration, the developer has two acceptable alternatives:  residential proposal or commercial proposal.   The main factor or state of nature that will influence the profitability of the development is whether or not a shopping center is built close by and the size of the shopping center.  There is a 20% chance of no center being built, a 50% chance of a medium shopping center built, and a 30% chance of a large shopping center. 
  • If the developer selects the residential proposal and no center is built, he has a further set of options: do nothing $400,000 payoff; build a small shopping center himself $700,000 payoff; or put in a park resulting in $800,000 payoff. Should a medium shopping center be built nearby, his payoff for residential would be $1,600,000 and large shopping center results in a $1,200,000 payoff.
  • If the developer selects the commercial proposal and no center is built, he also has the set of options: do nothing but payoff would be $-50,000; build a small shopping center himself for $1,400,000 payoff; or put in a park resulting in $1,000,000 payoff.  Should a medium shopping center be built nearby, his payoff for commercial would be $400,000 and large shopping center results in a $1,500,000 payoff.

b. Determine the EMV for the problem and identify the best decision.

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