Problem 13-21 (Algorithmic) A real estate investor has the opportunity to purchase land currently zoned residential. If the county board approves a request to rezone the property as commercial within the next year, the investor will be able to lease the land to a large discount firm that wants to open a new store on the property. However, if the zoning change is not approved, the investor will have to sell the property at a loss. Profits (in thousands of dollars) are shown in the following payoff table: State of Nature Rezoning Approved Rezoning Not Approved Decision Alternative S1 S2 Purchase, d1 630 -220 Do not purchase, d2 0 0 a. If the probability that the rezoning will be approved is 0.5, what decision is recommended? Recommended decision = PURCHASE What is the expected profit? Expected profit = $ _________ thousands. b. The investor can purchase an option to buy the land. Under the option, the investor maintains the rights to purchase the land anytime during the next three months while learning more about possible resistance to the rezoning proposal from area residents. Probabilities are as follows: Let H = High resistance to rezoning L = Low resistance to rezoning P(H) = 0.53 P(S1 | H) = 0.17 P(S2 | H) = 0.83 P(L) = 0.47 P(S1 | L) = 0.85 P(S2 | L) = 0.15 What is the optimal decision strategy if the investor uses the option period to learn more about the resistance from area residents before making the purchase decision? High resistance: DO NOT PURCHASE Low resistance: PURCHASE c. If the option will cost the investor an additional $10,000, should the investor purchase the option? Yes, because the expected value of the option is more than the cost of the option. What is the maximum that the investor should be willing to pay for the option? Round your answer to three decimal places. Why or why not? EVSI = $ ___________ thousands.
Critical Path Method
The critical path is the longest succession of tasks that has to be successfully completed to conclude a project entirely. The tasks involved in the sequence are called critical activities, as any task getting delayed will result in the whole project getting delayed. To determine the time duration of a project, the critical path has to be identified. The critical path method or CPM is used by project managers to evaluate the least amount of time required to finish each task with the least amount of delay.
Cost Analysis
The entire idea of cost of production or definition of production cost is applied corresponding or we can say that it is related to investment or money cost. Money cost or investment refers to any money expenditure which the firm or supplier or producer undertakes in purchasing or hiring factor of production or factor services.
Inventory Management
Inventory management is the process or system of handling all the goods that an organization owns. In simpler terms, inventory management deals with how a company orders, stores, and uses its goods.
Project Management
Project Management is all about management and optimum utilization of the resources in the best possible manner to develop the software as per the requirement of the client. Here the Project refers to the development of software to meet the end objective of the client by providing the required product or service within a specified Period of time and ensuring high quality. This can be done by managing all the available resources. In short, it can be defined as an application of knowledge, skills, tools, and techniques to meet the objective of the Project. It is the duty of a Project Manager to achieve the objective of the Project as per the specifications given by the client.
Problem 13-21 (Algorithmic)
A real estate investor has the opportunity to purchase land currently zoned residential. If the county board approves a request to rezone the property as commercial within the next year, the investor will be able to lease the land to a large discount firm that wants to open a new store on the property. However, if the zoning change is not approved, the investor will have to sell the property at a loss. Profits (in thousands of dollars) are shown in the following payoff table:
| State of Nature | ||
|
Rezoning Approved Rezoning Not Approved |
||
| Decision Alternative | S1 S2 | |
| Purchase, d1 | 630 -220 | |
| Do not purchase, d2 | 0 0 |
a. If the probability that the rezoning will be approved is 0.5, what decision is recommended?
Recommended decision = PURCHASE
What is the expected profit?
Expected profit = $ _________ thousands.
b. The investor can purchase an option to buy the land. Under the option, the investor maintains the rights to purchase the land anytime during the next three months while learning more about possible resistance to the rezoning proposal from area residents. Probabilities are as follows:
Let H = High resistance to rezoning L = Low resistance to rezoning P(H) = 0.53 P(S1 | H) = 0.17 P(S2 | H) = 0.83 P(L) = 0.47 P(S1 | L) = 0.85 P(S2 | L) = 0.15
What is the optimal decision strategy if the investor uses the option period to learn more about the resistance from area residents before making the purchase decision?
High resistance: DO NOT PURCHASELow resistance: PURCHASEc. If the option will cost the investor an additional $10,000, should the investor purchase the option? Yes, because the expected value of the option is more than the cost of the option.
What is the maximum that the investor should be willing to pay for the option? Round your answer to three decimal places. Why or why not?
EVSI = $ ___________ thousands.
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