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
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
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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.
OMI
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
Unfavorable Survey
0.40
Survey Result
High Demand
Low Demand
0.60
0.85
0.225
0.15
0.775
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](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fef5ede8c-f7ef-48c4-833c-ea0875dbbf1d%2Fc6fb5195-181e-4de8-8b18-047b0b101ad1%2Fknsyuyb_processed.jpeg&w=3840&q=75)
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.
OMI
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
Unfavorable Survey
0.40
Survey Result
High Demand
Low Demand
0.60
0.85
0.225
0.15
0.775
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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