4.4 is wrong. can you help me find the profit? Homework: HW#10-Module A-Decision

Question

4.4 is wrong.

can you help me find the profit?

Homework: HW#10-Module A-Decision Making Tools-Part#02 Score: 1.6 of 2 pts Save 4 of 5 (4 complete) HW Score: 69 33%, 6.93 of 10 pts Problem A.14 Question Help The city of Belgrade, Serbia, is contemplating building a second airport to relieve congestion at the main airport and is considering tro potential siles, X and Y. Hard Rock Hotels would like to purchase land to build a hotel at the new airport. The value of land has been rising in anticipation and is expected to skyrocket once the city decides between sites Xand Y. Consequently, Hard Rock would like to purchase land now. Hard Rock will sell the land if the city chooses not to locate the airport nearby. Hard Rock has four choices: (1) buy land at X, (2) buy land at Y, (3) buy land at both X and Y, or (4) do nothing. Hard Rock has collected the following data (which are in millions of euros) Current purchase price Profits if airport and hotel built at this site Sale price if airport not built at this site Site X 26 40 Site Y 18 40 Hard Rock determines there is a 55% chance the airport will be built at X (hence, a 45% chance it will be built at Y). a) Set up the decision table (in millions of euros) (enter your responses as whole numbers and include a minus sign if necessary). States of Nature Alternatives buy land at X buy land at Y buy land at both X and Y do nothing Probability airport at X airport at Y 14 - 15 10 0.55 0.45

Explanation / Answer

(All values of expected profit below are in millions of euros)

The expected profit for alternative ' Buy land at X' = 0.55 * 14 + 0.45 * (-15) = 0.95

The expected profit for alternative ' Buy land at Y' = 0.55 * (-10) + 0.45 * 22 = 4.4

The expected profit for alternative ' Buy land at X and Y' = 0.55 * 4 + 0.45 * 7 = 5.35

The expected profit for alternative ' Do nothing' = 0.55 * 0+ 0.45 * 0 = 0

Thus the best alternative is to buy land at both X and Y with a total net profit of 5.35 million euros.

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