| 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. |
|
| 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? | | | | Grading Points Per: |
| | | | Tasks | Assignment |
| # | Content per Tasks | | | | 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). | | | 1 |
| Task 2-1 | Prepare payoff tables and develop a decision tree for this problem (without probabilities and EMVs). | | | 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? | | | 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. | | | 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) | | | 2 |
| Task 2-5 | Prepare an executive summary | | | 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 |
