C and E bit are correct trying to get worked solution for rest of the problem. P
ID: 393415 • Letter: C
Question
C and E bit are correct trying to get worked solution for rest of the problem. Please take your time and provide the correct answers to the question:
A builder has located a piece of property that she would like to buy and eventually build on. The land is currently zoned for four homes per acre, but she is planning to request new zoning. What she builds depends on approval of zoning requests and your analysis of this problem to advise her. With her input and your help, the decision process has been reduced to the following costs, alternatives, and probabilities:
Cost of land: $2 million.
Probability of rezoning: 0.40.
If the land is rezoned, there will be additional costs for new roads, lighting, and so on, of $1 million.
If the land is rezoned, the contractor must decide whether to build a shopping center or 1,500 apartments that the tentative plan shows would be possible. If she builds a shopping center, there is a 70 percent chance that she can sell the shopping center to a large department store chain for $6 million over her construction cost, which excludes the land; and there is a 30 percent chance that she can sell it to an insurance company for $4 million over her construction cost (also excluding the land). If, instead of the shopping center, she decides to build the 1,500 apartments, she places probabilities on the profits as follows: There is a 40 percent chance that she can sell the apartments to a real estate investment corporation for $3,100 each over her construction cost; there is a 60 percent chance that she can get $2,520 each over her construction cost. (Both exclude the land cost.)
If the land is not rezoned, she will comply with the existing zoning restrictions and simply build 500 homes, on which she expects to make $3,500 over the construction cost on each one (excluding the cost of land).
a. What is the expected value for the rezoned shopping center, if the rezoning cost is included? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)
Expected value $ million
b. What is the expected value for the rezoned apartments, if the rezoning cost is included? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)
Expected value $ million
c. If the land is rezoned, what should the contractor decide?
d. What is the expected revenue, if the land is not rezoned? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)
Expected revenue $ million
e. What is the expected net profit of entire project? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)
Expected net profit $ million
Explanation / Answer
if she constructs real eastate, they can build 1500 flats.
the revenue is 40% can sell at $3100 and 60% can sell at $2520.
the revenue is= 1500*0.4*3100+1500*0.6*2520= $1,860,000+2,268,000= $4,128,000
the net profit is
if she goes with shopping complex, the revenues are:
she can gain total of $ 10 million with the probability of 40%, then the revenue becomes= $4 millions, but it requires an additional cost of $1 million for developing. Hence, the net profit becomes $3 million only.
if the land is not rezoned, the return is= 500* $3500= $1,750,000
c. if land is rezoned, it is better to go with Build Apartments
e. the net profits of each alternative mentioned above
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