A property owner is faced with a choice of: A large-scale investment to improve her flats. This could produce a substantial pay-off in terms of increased revenue net of costs but will require an investment of 1.4 million pesos. After extensive market research it is considered that there is a 40% chance that a pay-off of 2.5million will be obtained, but there is a 60% chance that it will be only 800,000 pesos. A smaller scale project to re-decorate her premises. At 500,000 pesos this is less costly but will produce a lower pay-off. Research data suggests a 30% chance of a gain of one million pesos but a 70% chance of being only 500,000 pesos.
A property owner is faced with a choice of: A large-scale investment to improve her flats. This could produce a substantial pay-off in terms of increased revenue net of costs but will require an investment of 1.4 million pesos. After extensive market research it is considered that there is a 40% chance that a pay-off of 2.5million will be obtained, but there is a 60% chance that it will be only 800,000 pesos. A smaller scale project to re-decorate her premises. At 500,000 pesos this is less costly but will produce a lower pay-off. Research data suggests a 30% chance of a gain of one million pesos but a 70% chance of being only 500,000 pesos.
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter17: Making Decisions With Uncertainty
Section: Chapter Questions
Problem 17.1IP
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A property owner is faced with a choice of:
- A large-scale investment to improve her flats. This could produce a substantial pay-off in terms of increased revenue net of costs but will require an investment of 1.4 million pesos. After extensive
market research it is considered that there is a 40% chance that a pay-off of 2.5million will be obtained, but there is a 60% chance that it will be only 800,000 pesos. - A smaller scale project to re-decorate her premises. At 500,000 pesos this is less costly but will produce a lower pay-off. Research data suggests a 30% chance of a gain of one million pesos but a 70% chance of being only 500,000 pesos.
- Continuing the present operation without change. It will cost nothing but neither will it produce any pay-off. Clients will be unhappy and it will become harder to rent the flats out when they become free.
What is the best alternative? Use decision tree analysis.
![1. A large-scale investment to improve her flats. This could produce a substantial pay-off in terms of increased revenue net of
costs but will require an investment of 1.4 million pesos. After extensive market research it is considered that there is a 40%
chance that a pay-off of 2.5million will be obtained, but there is a 60% chance that it will be only 800,000 pesos.
2. A smaller scale project to re-decorate her premises. At 500,000 pesos this is less costly but will produce a lower pay-off.
Research data suggests a 30% chance of a gain of one million pesos but a 70% chance of being only 500,000 pesos.
3. Continuing the present operation without change. It will cost nothing but neither will it produce any pay-off. Clients will be
unhappy and it will become harder to rent the flats out when they become free.
What is the best alternative? Use decision tree analysis.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F73e71a59-4617-4cb7-b7f5-841221b2adaa%2F1037596c-973a-47a5-87ff-04cadac7d109%2F1beyrc2_processed.png&w=3840&q=75)
Transcribed Image Text:1. A large-scale investment to improve her flats. This could produce a substantial pay-off in terms of increased revenue net of
costs but will require an investment of 1.4 million pesos. After extensive market research it is considered that there is a 40%
chance that a pay-off of 2.5million will be obtained, but there is a 60% chance that it will be only 800,000 pesos.
2. A smaller scale project to re-decorate her premises. At 500,000 pesos this is less costly but will produce a lower pay-off.
Research data suggests a 30% chance of a gain of one million pesos but a 70% chance of being only 500,000 pesos.
3. Continuing the present operation without change. It will cost nothing but neither will it produce any pay-off. Clients will be
unhappy and it will become harder to rent the flats out when they become free.
What is the best alternative? Use decision tree analysis.
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