A property owner is faced with a choice of:A large-scale investment to improve her flats. This could produce a substantial pay-off in terms of increased revenue net of costs but will require an investment of 1.4 million pesos. After extensive market research it is considered that there is a 40% chance that a pay-off of 2.5million will be obtained, but there is a 60% chance that it will be only 800,000 pesos.A smaller scale project to re-decorate her premises. At 500,000 pesos this is less costly but will produce a lower pay-off. Research data suggests a 30% chance of a gain of one million pesos but a 70% chance of being only 500,000 pesos.Continuing the present operation without change. It will cost nothing but neither will it produce any pay-off. Clients will be unhappy and it will become harder to rent the flats out when they become free. What is the best alternative? Use decision tree analysis. 1. A large-scale investment to improve her flats. This could produce a substantial pay-off in terms of increased revenue net ofcosts but will require an investment of 1.4 million pesos. After extensive market research it is considered that there is a 40%chance that a pay-off of 2.5million will be obtained, but there is a 60% chance that it will be only 800,000 pesos.2. A smaller scale project to re-decorate her premises. At 500,000 pesos this is less costly but will produce a lower pay-off.Research data suggests a 30% chance of a gain of one million pesos but a 70% chance of being only 500,000 pesos.3. Continuing the present operation without change. It will cost nothing but neither will it produce any pay-off. Clients will beunhappy and it will become harder to rent the flats out when they become free.What is the best alternative? Use decision tree analysis.

In order to identify the best courses of action, decision tree analysis is the process of creating a…

Answered: A property owner is faced with a choice…

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 17.1IP

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A property owner is faced with a choice of:

A large-scale investment to improve her flats. This could produce a substantial pay-off in terms of increased revenue net of costs but will require an investment of 1.4 million pesos. After extensive market research it is considered that there is a 40% chance that a pay-off of 2.5million will be obtained, but there is a 60% chance that it will be only 800,000 pesos.
A smaller scale project to re-decorate her premises. At 500,000 pesos this is less costly but will produce a lower pay-off. Research data suggests a 30% chance of a gain of one million pesos but a 70% chance of being only 500,000 pesos.
Continuing the present operation without change. It will cost nothing but neither will it produce any pay-off. Clients will be unhappy and it will become harder to rent the flats out when they become free.

What is the best alternative? Use decision tree analysis.

1. A large-scale investment to improve her flats. This could produce a substantial pay-off in terms of increased revenue net of
costs but will require an investment of 1.4 million pesos. After extensive market research it is considered that there is a 40%
chance that a pay-off of 2.5million will be obtained, but there is a 60% chance that it will be only 800,000 pesos.
2. A smaller scale project to re-decorate her premises. At 500,000 pesos this is less costly but will produce a lower pay-off.
Research data suggests a 30% chance of a gain of one million pesos but a 70% chance of being only 500,000 pesos.
3. Continuing the present operation without change. It will cost nothing but neither will it produce any pay-off. Clients will be
unhappy and it will become harder to rent the flats out when they become free.
What is the best alternative? Use decision tree analysis.

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