You are a homeowner that has accepted a new job. The new job requires a commute that is undesirably long, but not impossible. You would like to sell your home and move into a new one nearer your job. Your discount rate for the funds received from the sale is 8% (annualized). Potential buyers will come, view and inspect the home, and negotiate a price offer. Your decision is to set (in your mind) the lowest such offer you are willing to accept. For simplicity, we will assume your decision must be an increment of 10K (i.e., 500K, 510K, 520K etc.) We will not go into the details of the negotiating process, and just assume that the eventual price offers come from a random process described below. 4. For-Sale-by-Owner. If you sell on your own, you will generate price offers that are uniformly distributed between [500K, 550K] USD, and will attract one offer every 2 months. However, as commission, the buyer’s agent will get 3% of the sale price (you will get the other 97%). a. To maximize the expected present value of the sales proceeds, what is the lowest price you should be willing to accept (again, restricting attention to increments of $10K)? b. Using your solution to part (a), what is the expected present value of the sales proceeds? c. Using your solution to (a), what is the expected value of the sale price? d. Comment on how the expected sale price is not a sufficient metric for the value of setting any particular lowest-acceptable-price.

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 20P: Alexander Industries is considering purchasing an insurance policy for its new office building in...

See similar textbooks

Related questions

Question

You are a homeowner that has accepted a new job. The new job requires a commute that is undesirably long, but not impossible. You would like to sell your home and move into a new one nearer your job. Your discount rate for the funds received from the sale is 8% (annualized). Potential buyers will come, view and inspect the home, and negotiate a price offer. Your decision is to set (in your mind) the lowest such offer you are willing to accept. For simplicity, we will assume your decision must be an increment of 10K (i.e., 500K, 510K, 520K etc.) We will not go into the details of the negotiating process, and just assume that the eventual price offers come from a random process described below. 4. For-Sale-by-Owner. If you sell on your own, you will generate price offers that are uniformly distributed between [500K, 550K] USD, and will attract one offer every 2 months. However, as commission, the buyer’s agent will get 3% of the sale price (you will get the other 97%). a. To maximize the expected present value of the sales proceeds, what is the lowest price you should be willing to accept (again, restricting attention to increments of $10K)? b. Using your solution to part (a), what is the expected present value of the sales proceeds? c. Using your solution to (a), what is the expected value of the sale price? d. Comment on how the expected sale price is not a sufficient metric for the value of setting any particular lowest-acceptable-price.

Expert Solution

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here