Mat 540 Week 2 Homework - Latest 2015 Essay

802 Words Jul 14th, 2015 4 Pages
MAT 540 Week 2 Homework - latest 2015

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Chapter 12

1. A local real estate investor in Orlando is considering three alternative investments: a motel, a restaurant, or a theater. Profits from the motel or restaurant will be affected by the availability of gasoline and the number of tourists; profits from the theater will be relatively stable under any conditions. The following payoff table shows the profit or loss that could result from each investment:
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3. Place-Plus, a real estate development firm, is considering several alternative development projects. These include building and leasing an office park, purchasing a parcel of land and building an office building to rent, buying and leasing a warehouse, building a strip mall, and building and selling

MAT540 Homework

Week 2 Page 2 of 3

condominiums. The financial success of these projects depends on interest rate movement in the next 5 years. The various development projects and their 5-year financial return (in $1,000,000s) given that interest rates will decline, remain stable, or increase, are shown in the following payoff table. Place-Plus real estate development firm has hired an economist to assign a probability to each direction interest rates may take over the next 5 years. The economist has determined that there is a .50 probability that interest rates will decline, a .40 probability that rates will remain stable, and a .10 probability that rates will increase.

a. Using expected value, determine the best project.

b. Determine the expected value of perfect information.

Interest Rate

Project Decline Stable Increase

Office park $0.5 $1.7 $4.5

Office building 1.5 1.9 2.5

Warehouse 1.7 1.4

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