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Problem 2 Homely Development Corporation is considering bidding on a contract for a new office complex. The company needs to decide if it should bid on the contract. The codt of preparing the bid is $200,000. The company estimates that it has an 80% chance of winning the contract and 20% of losing the bid. If the company wins the bid it will have to pay $2,000,000 to become a partner in the contract. Once they are partners in the contract, they could conduct a market research study at $150,000. The research project could return with a forecast of a high market demand or low market demand. Regardless of the survey result must decide if they want to build the office complex or sell the rights to another company. Homely estimates that selling the contract rights will generate revenues of $3,500,000. If Homely decides to build the office complex they will generate $5,000,000 in revenue if demand is high and $3,000,000 if demand is low. Information for this project is listed below. Cost of bid: $200,000 Partnership fee (if bid is won): $2,000,000 Market research study: $150,000. Sell the rights: $3,500,000 in revenue Build the complex: $5,000,000 in revenue if demand is high, $3,000,000 in revenue if demand is low The probabilities for Homely Development are listed below. Probability of winning contract: 0.80 Probability of losing contract: 0.20 Survey Result High Demand Low Demand Favorable Survey 0.60 0.85 0.15 a) Using a decision tree determine the optimal strategy for Homely Development. b) What is the expected profit for this project? Hint: The profit equations are: With Survey: Revenue - Cost of Bid - Partnership fee - Cost of survey Without Survey Revenue - Cost of bid - Partnership fee Lose Bid Cost of bid Unfavorable Survey 0.40 0.225 0.775

Problem 2 Homely Development Corporation is considering bidding on a contract for a new office complex. The company needs to decide if it should bid on the contract. The codt of preparing the bid is $200,000. The company estimates that it has an 80% chance of winning the contract and 20% of losing the bid. If the company wins the bid it will have to pay $2,000,000 to become a partner in the contract. Once they are partners in the contract, they could conduct a market research study at $150,000. The research project could return with a forecast of a high market demand or low market demand. Regardless of the survey result must decide if they want to build the office complex or sell the rights to another company. Homely estimates that selling the contract rights will generate revenues of $3,500,000. If Homely decides to build the office complex they will generate $5,000,000 in revenue if demand is high and $3,000,000 if demand is low. Information for this project is listed below. Cost of bid: $200,000 Partnership fee (if bid is won): $2,000,000 Market research study: $150,000. Sell the rights: $3,500,000 in revenue Build the complex: $5,000,000 in revenue if demand is high, $3,000,000 in revenue if demand is low The probabilities for Homely Development are listed below. Probability of winning contract: 0.80 Probability of losing contract: 0.20 Survey Result High Demand Low Demand Favorable Survey 0.60 0.85 0.15 a) Using a decision tree determine the optimal strategy for Homely Development. b) What is the expected profit for this project? Hint: The profit equations are: With Survey: Revenue - Cost of Bid - Partnership fee - Cost of survey Without Survey Revenue - Cost of bid - Partnership fee Lose Bid Cost of bid Unfavorable Survey 0.40 0.225 0.775

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Problem 2 Homely Development Corporation is considering bidding on a contract for a new office complex. The company needs to decide if it should bid on the contract. The codt of preparing the bid is $200,000. The company estimates that it has an 80% chance of winning the contract and 20% of losing the bid. If the company wins the bid it will have to pay $2,000,000 to become a partner in the contract. Once they are partners in the contract, they could conduct a market research study at $150,000. The research project could return with a forecast of a high market demand or low market demand. Regardless of the survey result must decide if they want to build the office complex or sell the rights to another company. Homely estimates that selling the contract rights will generate revenues of $3,500,000. If Homely decides to build the office complex they will generate $5,000,000 in revenue if demand is high and $3,000,000 if demand is low. Information for this project is listed below. Cost of bid: $200,000 Partnership fee (if bid is won): $2,000,000 Market research study: $150,000 Sell the rights: $3,500,000 in revenue Build the complex: $5,000,000 in revenue if demand is high, $3,000,000 in revenue if demand is low The probabilities for Homely Development are listed below. Probability of winning contract: 0.80 Probability of losing contract: 0.20 Favorable Survey Survey Result High Demand 0.60 0.85 0.15 Unfavorable Survey 0.40 0.225 0.775 Low Demand a) Using a decision tree determine the optimal strategy for Homely Development. b) What is the expected profit for this project? Hint: The profit equations are: With Survey: Revenue - Cost of Bid- Partnership fee - Cost of survey Without Survey Revenue - Cost of bid- Partnership fee Lose Bid Cost of bid
Transcribed Image Text:Problem 2 Homely Development Corporation is considering bidding on a contract for a new office complex. The company needs to decide if it should bid on the contract. The codt of preparing the bid is $200,000. The company estimates that it has an 80% chance of winning the contract and 20% of losing the bid. If the company wins the bid it will have to pay $2,000,000 to become a partner in the contract. Once they are partners in the contract, they could conduct a market research study at $150,000. The research project could return with a forecast of a high market demand or low market demand. Regardless of the survey result must decide if they want to build the office complex or sell the rights to another company. Homely estimates that selling the contract rights will generate revenues of $3,500,000. If Homely decides to build the office complex they will generate $5,000,000 in revenue if demand is high and $3,000,000 if demand is low. Information for this project is listed below. Cost of bid: $200,000 Partnership fee (if bid is won): $2,000,000 Market research study: $150,000 Sell the rights: $3,500,000 in revenue Build the complex: $5,000,000 in revenue if demand is high, $3,000,000 in revenue if demand is low The probabilities for Homely Development are listed below. Probability of winning contract: 0.80 Probability of losing contract: 0.20 Favorable Survey Survey Result High Demand 0.60 0.85 0.15 Unfavorable Survey 0.40 0.225 0.775 Low Demand a) Using a decision tree determine the optimal strategy for Homely Development. b) What is the expected profit for this project? Hint: The profit equations are: With Survey: Revenue - Cost of Bid- Partnership fee - Cost of survey Without Survey Revenue - Cost of bid- Partnership fee Lose Bid Cost of bid
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