Tromple Dump a new york real estate develoer is attempting to choose between 3 r

Question

Tromple Dump a new york real estate develoer is attempting to choose between 3 real estate investments. A 200 room hotel in midtown, a tribeca apartment house with 150 units, or a lower manhattan 100 unit new development. The midtown hotel will cost $120 million, the tribeca apartment house will cost$140 million and the lower manhattan development will cost $90 million. If the market flourishes, the midtown will return 30% of the initial investment, the tribeca 25% and the lower manhattan 40%. if the market stagnates the midtown will lose 10%, the tribeca will lose 12% and the lower manhattan will gain only 5%. The developer believes the chance of the market flourishing is only 45%. The chance of the market stagnating is 55%. What is the EMV of the three choices? What is the best decision based on the EMV or estimated monetary valve?

Explanation / Answer

New Development is the best option.

Prob 0.45 0.55 Return rates Cost Flourishes Stagnant Option 1 Midtown hotel 120 0.3 -0.1 Option 2 Apartment house 140 0.25 -0.12 Option 3 New Dev 90 0.4 0.05 Prob 0.45 0.55 Actual returns Cost Flourishes Stagnant EMV Option 1 Midtown hotel 120 36 -12 9.6 Option 2 Apartment house 140 35 -16.8 6.51 Option 3 New Dev 90 36 4.5 18.675 Best decision

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