| Assignment 2: Case Problem "Real Estate Development: Select a New Project" |
| Problem Description |
| A real estate company is considering the development of one of the following three possible projects: (1) an apartment building; (2) an office building; (3) a warehouse. The amount of payoff (profit) that could be earned by selling the estate depends on the economic conditions, specified as: optimistic, realistic and pessimistic. |
| The estimated payoffs and probabilities under optimistic, realistic and pessimistic conditions are shown as follows: |
| Alternatives |
States of Nature |
|
Optimistic Conditions |
Realistic Conditions |
Pessimistic Conditions |
| Apartment Building |
A |
B |
C |
| Office Building |
D |
E |
F |
| Warehouse |
G |
H |
I |
| Probability |
x |
y |
z |
| In preparation for a final decision, the company is considering the hiring of a business analyst. If the company hires the analyst, the decision regarding which project to develop will not be made until the analyst presents a survey. However, the analyst is requesting an upfront payment for the survey in the amount of Z. The probabilities of the survey results to be positive or negative are i and k. |
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| Summary tables, in case the company hires a business analyst: |
| Fee for Survey |
Z |
| Probability of survey results positive |
i |
| Probability of survey results negative |
k |
| (1) If the survey results are positive: |
| Alternatives |
States of Nature |
|
Optimistic Conditions |
Realistic Conditions |
Pessimistic Conditions |
| Apartment Building |
A – Z |
B – Z |
C – Z |
| Office Building |
D – Z |
E – Z |
F – Z |
| Warehouse |
G – Z |
H – Z |
I – Z |
| Probability |
d |
e |
f |
| (2) If the survey results are negative: |
| Alternatives |
States of Nature |
|
Optimistic Conditions |
Realistic Conditions |
Pessimistic Conditions |
| Apartment Building |
A – Z |
B – Z |
C – Z |
| Office Building |
D – Z |
E – Z |
F – Z |
| Warehouse |
G – Z |
H – Z |
I – Z |
| Probability |
g |
h |
n |
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| Assignment 2: Starting Conditions |
| Each student will receive from the instructor an excel file with a different dataset for payoffs (A to I) and probabilities (x,y,z,i,k,d,e,f,g,h,n). You have to prepare and submit a managerial report where you should answer the question: Which one of the development projects should be selected? And based on your estimates, should the company hire the business analyst? |
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Grading Points Per: |
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Tasks |
Assignment |
| # |
Content per Tasks |
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10 |
| Task 2-0 |
Students should structure and present their Assignment 2 in the form of a Managerial Report. The expected length of the main body (tasks 2-1 to 2-4) is up to 3 pages APA format, excluding cover page, table of content, executive summary (task 2-5), and appendices (screenshots of the Payoff Table, EMV Table, Sensitivity Analysis Diagram, TreePlan Diagram of the Decision Tree). Submission requirements: Managerial Report (word file), and excel file with completed worksheets (iii) to (vi). |
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1 |
| Task 2-1 |
Prepare payoff tables and develop a decision tree for this problem (without probabilities and EMVs). |
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2 |
| Task 2-2 |
Given the probability of all three economic conditions and using expected monetary values (EMVs), calculate EMVs for each node and answer the questions: (1) What's the EMV for not hiring a business analyst and the EMV for hiring a business analyst? (2) What is your recommendation: to hire or not to hire a business analyst? |
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2 |
| Task 2-3 |
Use sensitivity analysis to define the probability range with respect to the survey results which might affect the decision to hire or not to hire a business analyst, draw the sensitivity chart, and find the probability for their cross point. |
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2 |
| Task 2-4 |
Apply a software tool for the construction of a decision tree with payoffs, probabilities, and EMVs. The recommended tool is TreePlan: a Microsoft Excel Add-Ins (it is preinstalled on all V-PCs of the MET V-LABs) |
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2 |
| Task 2-5 |
Prepare an executive summary |
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1 |
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List of Worksheets in the Excel File (it should be used as a reference for different tasks of the managerial report) |
| (i) |
A2 Text |
| (ii) |
Payoff Table – Template |
| (iii) |
Payoff Table – Solution and a sketch of a decision tree (without probability and EMVs) –> Needed for Task 2-1 |
| (iv) |
EMV Calculation: use EMV as a decision criterion for each decision nodes and states of nature nodes, calculate the EMV for each node, and recommend whether to hire/not to hire a business analyst –> Needed for Task 2-2 |
| (v) |
Sensitivity Analysis Diagram: compute the probability of survey results and define the range of probability values that the real estate company would hire or not hire a business analyst (including the probability of the cross point) –> Needed for Task 2-3 |
| (vi) |
TreePlan Diagram of the Decision Tree: use BU MET V-LAB for Excel Add-In TreePlan –> Needed for Task 2-4 |
