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Assignment2.xlsx

A2 Text

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:
AlternativesStates of Nature
Optimistic ConditionsRealistic ConditionsPessimistic Conditions
Apartment BuildingABC
Office BuildingDEF
WarehouseGHI
Probabilityxyz
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.
Summary tables, in case the company hires a business analyst:
Fee for SurveyZ
Probability of survey results positivei
Probability of survey results negativek
(1) If the survey results are positive:
AlternativesStates of Nature
Optimistic ConditionsRealistic ConditionsPessimistic Conditions
Apartment BuildingA – ZB – ZC – Z
Office BuildingD – ZE – ZF – Z
WarehouseG – ZH – ZI – Z
Probabilitydef
(2) If the survey results are negative:
AlternativesStates of Nature
Optimistic ConditionsRealistic ConditionsPessimistic Conditions
Apartment BuildingA – ZB – ZC – Z
Office BuildingD – ZE – ZF – Z
WarehouseG – ZH – ZI – Z
Probabilityghn
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?Grading Points Per:
TasksAssignment
#Content per Tasks10
Task 2-0Students 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).1
Task 2-1Prepare payoff tables and develop a decision tree for this problem (without probabilities and EMVs).2
Task 2-2Given 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?2
Task 2-3Use 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.2
Task 2-4Apply 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)2
Task 2-5Prepare an executive summary1
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

Payoff Table Template

Task 2-1 Payoff Table Solution

1. If the company does not hire a business analyst:
AlternativesStates of Nature
Optimistic ConditionsRealistic ConditionsPessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
2. If the company hires a business analyst:
Fee for Survey
2.1 If the analysis report is positive:
AlternativesStates of Nature
Optimistic ConditionsRealistic ConditionsPessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
2.2 If the analysis report is negative:
AlternativesStates of Nature
Optimistic ConditionsRealistic ConditionsPessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
3. Sketch of a Decision Tree (without probability and EMVs):

Task 2-2 Solution

1. If the company does not hire a business analyst:
AlternativesStates of NatureEMVNode
Optimistic ConditionsRealistic ConditionsPessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
2. If the company hires a business analyst:
Fee for Survey
2.1 If the analysis report is positive:
AlternativesStates of NatureEMVNode
Optimistic ConditionsRealistic ConditionsPessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
2.2 If the analysis report is negative:
AlternativesStates of NatureEMVNode
Optimistic ConditionsRealistic ConditionsPessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
3. Final Solution
3.1 EMV (hire a business analyst)
Probability of report results positive
Probability of report results negative
Node
EMV (Report results positive)
EMV (Report results negative)
EMV (Hire a business analyst)
3.2 Final EMVNode
EMV (Hire a business analyst)
EMV (Do not hire a business analyst)
Final EMV (Hire/Do not hire a business analyst)

Task 2-3 Solution

Task 2-4 Solution

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