C&A has to decide whether to build a new shopping center, or build the new shopp
ID: 429273 • Letter: C
Question
C&A has to decide whether to build a new shopping center, or build the new shopping center after a pilot study. If the new shopping center is successful, C&A will make a profit of $300 million. If the new shopping center fails, C&A will lose $150 million. C&A estimates that there is 30% chance that the new shopping center will fail. The other option is to conduct a pilot study and then decide whether or not to build. The pilot study will cost $10 million. C&A will build a new shopping center only if the result of the pilot study is favorable. The probability of a favorable pilot study is 60%. At this time, there will be an 80% chance that the new shopping center will make a profit of $400 million and 20% chance that there will be a loss of $100 million. What decision should be made and what is the expected value of that decision?
Build a new shopping center, $165 million.
Do a pilot study then decide, $170 million.
Build a new shopping center, $170 million.
Do a pilot study then decide, $165 million.
None of the above
Build a new shopping center, $165 million.
Do a pilot study then decide, $170 million.
Build a new shopping center, $170 million.
Do a pilot study then decide, $165 million.
None of the above
Explanation / Answer
do a pilot study then decide to invest $170 million.
because once if the pilot study is favorable then they will get benefits only.
as per the probability the benefits are = 400*0.8= $320 million
as per the probability the loss will be= 100*0.2= $20 million
and the pilot project cost is $10 million
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