Can please show me who you got that step by step and where it came from?

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 20P: The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting,...
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1. Verify Dante’s profit projections shown at the ending branches of the decision tree by calculating the payoffs of $2,650,000, $650,000, and $1,150,000 for first three outcomes? I provided belwo how the result of the first two outcomes where they came from. But I don't where $1,150,000 came from? I need your help verifying and Correcting the calculation for the three payoffs.  Can please show me who you got that step by step and where it came from?

IF Demand is High

  • Estimated income that results from building the complex=$5,000,000
  • The cost of preparing the bid is $200,000
  • Amount that company have to pay if it wins the bid = $2,000,000
  • The cost of this study = $150,000

So, the profit projection at the ending branch of nods 8

=5,000,000-200,000-2,000,000-150,000

=$2,650,000

IF Demand is Moderate:

  • Estimated income that results from building the complex=$3,000,000
  • The cost of preparing the bid is $200,000
  • Amount that company have to pay if it wins the bid = $2,000,000
  • The cost of this study = $150,000

So, the profit projection at the ending branch of nods 8

=3,000,000-200,000-2,000,000-150,000

=$650,000

 

 

Dante Development Corporation is considering bidding on a contract for a new office building complex.
The following figure shows the decision tree prepared by one of Dante's analysts. At node 1, the
company must decide whether to bid on the contract. The cost of preparing the bid is $200,000. The
upper branch from node 2 shows that the company has a 0.8 probability of winning the contract if it
submits a bid. If the company wins the bid, it will have to pay $2 million to become a partner in the
project. Node 3 shows that the company will then consider doing a market research study to forecast
demand for the office units prior to beginning construction. The cost of this study is $150,000. Node 4 is
a chance node showing the possible outcomes of the market research study.
Nodes 5, 6, and 7 are similar in that they are the decision nodes for Dante to cither build the office
complex or sell the rights in the project to another developer. The decision to build the complex will
result in an income of $5 million if demand is high and $3 million if demand is moderate. If Dante
chooses to sell its rights in the project to another developer, income from the sale is estimated to be $1.5
million. The probabilities shown at nodes 4, 8, and 9 are based on the projected outcomes of the market
rescarch study.
Prefit ($100s)
High Demand
0.85
2,650
Build Comples
Forecast High
0.6
Moderate Demand
0.15
650
Sell
1,150
Market Research
High Demand
2,650
Build Complex
0.225
Moderate Demand
0.775
Forecast Moderate
650
0.4
Win Contract
Sell
1,150
0.8
High Demand
2,800
Build Complex
0.6
Bid
No Market Research
Moderate Demand
800
Sell
1,300
Lose Contract
-200
0.2
Do Not Bid
1. Verify Dante's profit projections shown at the ending branches of the decision tree by calculating
the payoffs of $2,650,000, $650,000, and $1,150,000 for first three outcomes.
2. What is the optimal decision strategy for Dante, and what is the expected profit for this projec?
3. What would the cost of the market rescarch study have to be before Dante would change
its decision about the market research study?
Transcribed Image Text:Dante Development Corporation is considering bidding on a contract for a new office building complex. The following figure shows the decision tree prepared by one of Dante's analysts. At node 1, the company must decide whether to bid on the contract. The cost of preparing the bid is $200,000. The upper branch from node 2 shows that the company has a 0.8 probability of winning the contract if it submits a bid. If the company wins the bid, it will have to pay $2 million to become a partner in the project. Node 3 shows that the company will then consider doing a market research study to forecast demand for the office units prior to beginning construction. The cost of this study is $150,000. Node 4 is a chance node showing the possible outcomes of the market research study. Nodes 5, 6, and 7 are similar in that they are the decision nodes for Dante to cither build the office complex or sell the rights in the project to another developer. The decision to build the complex will result in an income of $5 million if demand is high and $3 million if demand is moderate. If Dante chooses to sell its rights in the project to another developer, income from the sale is estimated to be $1.5 million. The probabilities shown at nodes 4, 8, and 9 are based on the projected outcomes of the market rescarch study. Prefit ($100s) High Demand 0.85 2,650 Build Comples Forecast High 0.6 Moderate Demand 0.15 650 Sell 1,150 Market Research High Demand 2,650 Build Complex 0.225 Moderate Demand 0.775 Forecast Moderate 650 0.4 Win Contract Sell 1,150 0.8 High Demand 2,800 Build Complex 0.6 Bid No Market Research Moderate Demand 800 Sell 1,300 Lose Contract -200 0.2 Do Not Bid 1. Verify Dante's profit projections shown at the ending branches of the decision tree by calculating the payoffs of $2,650,000, $650,000, and $1,150,000 for first three outcomes. 2. What is the optimal decision strategy for Dante, and what is the expected profit for this projec? 3. What would the cost of the market rescarch study have to be before Dante would change its decision about the market research study?
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