Ruka construction Company is considering bidding on a contract for a new office building complex. First company manger must decide whether to bid on the contract or not. The cost of preparing the bid is $20,000. The company has a 0.75 probability of winning the contract if it submits a bid. If the company wins the bid, it will have to pay $1,500,000 to become a partner in the project. The company will then consider doing a market research study to forecast demand prior to beginning construction. The cost of this study is $100,000. The possible outcomes of the market research study show there is 45% for high interest and 35% for moderate and 20% for low interest for office building. The manager of the company regardless of the result of market study or even without doing market study should decide whether to build the complex or to sell the rights in the project to another developer. If company decides to build the complex, cost of building will be $10,000,000. Based on market study result the company manager estimate the following prices. If Demand is high, price of finished building will be $15,000,000. If Demand is moderate, price of finished building will be $14,000,000. If Demand is low, price of finished building will be $13,000,000. Also, company manager can sell its rights in the project to another developer, at any time for $3,000,000. The following probabilities is given based on market study: P (Demand is High | Forecast is High) =0.60 P (Demand is Moderate | Forecast is High) =0.30 P (Demand is Low | Forecast is High) =0.10 P (Demand is High | Forecast is Moderate) =0.50 P (Demand is Moderate | Forecast is Moderate) =0.35 P (Demand is Low | Forecast is Moderate) =0.15 P (Demand is High | Forecast is Low) =0.30 P (Demand is Moderate | Forecast is Low) =0.25 P (Demand is Low | Forecast is Low) =0.45 P (Demand is High Without Market Study) =0.50 P (Demand is Moderate Without Market Study) =0.30 P (Demand is Low Without Market Study) =0.20 a. Make the risk profile. Hint: 1) Decide whether to bid the contract or not 2) If company win, decide whether to do market study or not 3) Market study results is either forecast is high, Forecast is moderate, or Forecast is low. 4) At any situation even if you will not do market study you should decide whether to build the complex or sell company rights 5) If you build the complex, still market can be at high, moderate or low demand

Ruka construction Company is considering bidding on a contract for a new office building complex. First company manger must decide whether to bid on the contract or not. The cost of preparing the bid is $20,000. The company has a 0.75 probability of winning the contract if it submits a bid. If the company wins the bid, it will have to pay $1,500,000 to become a partner in the project. The company will then consider doing a market research study to forecast demand prior to beginning construction. The cost of this study is $100,000. The possible outcomes of the market research study show there is 45% for high interest and 35% for moderate and 20% for low interest for office building. The manager of the company regardless of the result of market study or even without doing market study should decide whether to build the complex or to sell the rights in the project to another developer. If company decides to build the complex, cost of building will be $10,000,000. Based on market study result the company manager estimate the following prices. If Demand is high, price of finished building will be $15,000,000. If Demand is moderate, price of finished building will be $14,000,000. If Demand is low, price of finished building will be $13,000,000. Also, company manager can sell its rights in the project to another developer, at any time for $3,000,000. The following probabilities is given based on market study: P (Demand is High | Forecast is High) =0.60 P (Demand is Moderate | Forecast is High) =0.30 P (Demand is Low | Forecast is High) =0.10 P (Demand is High | Forecast is Moderate) =0.50 P (Demand is Moderate | Forecast is Moderate) =0.35 P (Demand is Low | Forecast is Moderate) =0.15 P (Demand is High | Forecast is Low) =0.30 P (Demand is Moderate | Forecast is Low) =0.25 P (Demand is Low | Forecast is Low) =0.45 P (Demand is High Without Market Study) =0.50 P (Demand is Moderate Without Market Study) =0.30 P (Demand is Low Without Market Study) =0.20 a. Make the risk profile. Hint: 1) Decide whether to bid the contract or not 2) If company win, decide whether to do market study or not 3) Market study results is either forecast is high, Forecast is moderate, or Forecast is low. 4) At any situation even if you will not do market study you should decide whether to build the complex or sell company rights 5) If you build the complex, still market can be at high, moderate or low demand

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Ruka construction Company is considering bidding on a contract for a new office building complex. First company manger must decide whether to bid on the contract or not. The cost of preparing the bid is $20,000. The company has a 0.75 probability of winning the contract if it submits a bid. If the company wins the bid, it will have to pay $1,500,000 to become a partner in the project. The company will then consider doing a market research study to forecast demand prior to beginning construction. The cost of this study is $100,000. The possible outcomes of the market research study show there is 45% for high interest and 35% for moderate and 20% for low interest for office building. The manager of the company regardless of the result of market study or even without doing market study should decide whether to build the complex or to sell the rights in the project to another developer. If company decides to build the complex, cost of building will be $10,000,000. Based on market study result the company manager estimate the following prices. If Demand is high, price of finished building will be $15,000,000. If Demand is moderate, price of finished building will be $14,000,000. If Demand is low, price of finished building will be $13,000,000. Also, company manager can sell its rights in the project to another developer, at any time for $3,000,000. The following probabilities is given based on market study: P (Demand is High | Forecast is High) =0.60 P (Demand is Moderate | Forecast is High) =0.30 P (Demand is Low | Forecast is High) =0.10 P (Demand is High | Forecast is Moderate) =0.50 P (Demand is Moderate | Forecast is Moderate) =0.35 P (Demand is Low | Forecast is Moderate) =0.15 P (Demand is High | Forecast is Low) =0.30 P (Demand is Moderate | Forecast is Low) =0.25 P (Demand is Low | Forecast is Low) =0.45 P (Demand is High Without Market Study) =0.50 P (Demand is Moderate Without Market Study) =0.30 P (Demand is Low Without Market Study) =0.20 a. Make the risk profile. Hint: 1) Decide whether to bid the contract or not 2) If company win, decide whether to do market study or not 3) Market study results is either forecast is high, Forecast is moderate, or Forecast is low. 4) At any situation even if you will not do market study you should decide whether to build the complex or sell company rights 5) If you build the complex, still market can be at high, moderate or low demand

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