Assignment 3 - MSBA

Question 1 (25 points)

This is a Category A Assignment.  You must work alone (do not communicate in any way with another person regarding this assignment except the instructor or the MSBA GAs). Use of online tutoring sites or document sharing platforms (including but not limited to Chegg, Course Hero, etc.) are not allowed. The William & Mary Honor Code applies.

You will be submitting your responses in a pdf file via Gradescope as explained in the instructions below. Some questions will ask you to draw a decision tree. If you prefer to draw the decision tree(s) by hand, you should either scan it or take a picture and paste it in the document; but you need to ensure that it is readable. Otherwise, you may lose points.

Instructions to Submit Assignment 3 via Gradescope

Please use the Word file “Assignment 3 – Template for Submission” to include your responses for Assignment 3.  Please read and follow the instructions below when you prepare your work.

• You are expected to follow the question order provided in the template.
• Do not change, remove or replace any question heading in the template. Parts a, b, c for Question 1 should be on the same page and at the spaces designated in the template. Question 2 Part a, Question 2 Part b, Question 3 and Question 4 should start on a new page.
• Make sure to use only the allocated space for your responses and adjust the blank lines as needed(this may be required to ensure each question or sub-question starts at the spot designated in the template).
• Once you input all the responses, you will save your file as a pdf documentand upload it via Gradescope by the deadline.

Failure to follow these instructions may results in loss of points. Please let me know if you need help at any point during the submission.

John Smith is considering several investment alternatives and need to select one. The return on investment for the next year is dependent on the interest rate during the next year. The current rate is 8%, and John anticipates that it remains the same or go up or down by at most two points. The investment alternatives as well as their returns, given the interest rate changes, are shown in the following table:

 

Determine the best investment alternative and the corresponding return using the following decision criteria.

1. Aggressive (Optimistic)
2. Conservative (Pessimistic)
3. Opportunity Loss

Note: You can include details of your calculations in the Appendix at the end of the template. This can help you to earn partial credit, even if your responses are not correct

According to a new report from the United Nations’ Intergovernmental Panel on Climate Change, hurricanes are becoming stronger, rainfalls are heavier and flood risk is higher. Living in an area that is somewhat close to the coast, you consider purchasing flood insurance for your home for this year. In your area, the cost of flood insurance is $772.

If you are hit by a major flood, your anticipated costs for repair is $200,000. A minor flood in your area will result in an estimated repair cost of $30,000. If you choose to purchase flood insurance, it will cover the cost of damage up to $180,000.

1. Develop a payoff table for this situation. What decision should you make using each strategy?
2. Aggressive (Optimistic)
3. Conservative (Pessimistic)
4. Opportunity Loss

Question 2 (25 points)

A. Historical data combined with the forecasts show that the chances of a major flood affecting your area is 0.03%. On the other hand, there is a 0.13% chance that a minor flood will affect your area. Construct a decision tree and identify the best expected value decision.

Your friend, Julia, owns a corner store in your neighborhood. She purchases fresh milk from a nearby farm and sells them in her store. Cost of the milk is $5 per case, and each case can be sold for $6 per case. Since the milk does not go through rigorous treatment, it should be sold within a week. Any milk that is not sold during the week can be sold back to the farm for $2 per case. Based on the historical, she identified the following probability distribution of the demand.

 

One of the reasons why people come to her store is the availability of fresh milk, and those customers typically make other purchases along with fresh milk. She believes there will be a loss of such sales if she is not able to have enough fresh milk in the store, and estimates this loss to be $2 per case.

Julia needs some help to determine how many cases of fresh milk she needs to order for the coming week. Construct a payoff table for this decision situation. Determine the number of cases of milk she should order based on the expected profit.

a. You work as an intern in a consulting firm, and your team is assigned to work with Herndon Development Group (HDG). They have some cash available and need some advice regarding their investment options.

b. HDG have identified a piece of land that they can purchase and build on. The cost of land is $2 million and the current zoning allows for 5 homes per acre. However, they will apply for new zoning, which enables other investment opportunities. The city council evaluates the rezoning application and there is a 60% chance for approval. If they get the approval for rezoning, they need to spend an additional $1 million on new infrastructure.

c. If the rezoning is approved, they need to determine what they want to build. They can either build a shopping center or an apartment complex. Cost of building a shopping center is $2 million, and there is a 70% chance that they can sell the shopping center to a large department store for $6 million. The other possibility is selling the shopping center to an insurance company for $6.5 million. If the land is rezoned, the other option they consider is building an apartment complex with 3000 units with a total cost of $1.5 million. If they build the apartment complex, they can sell them to a real estate investment corporation. However, the sales price depends on the economic conditions; they estimate a 60% chance for an average selling price of $2,000 per unit, and a 40% chance for an average selling price of $1,500 per unit.

d. If the city council does not approve the rezoning, HDG will follow the existing zoning restrictions and simply build 60 homes. The average profit margin on a new home is $40,000.

Instead of purchasing this land, they can use the available cash in a different investment option, which will return $400,000.

What are your recommendations for HDG for this sequence of decisions?