AD715, 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 payoff (profit) earned by selling
the estate depends on the optimistic, realistic, and pessimistic economic conditions.
The decision table below summarizes the estimated payoffs and probabilities under optimistic, realistic,
and pessimistic conditions (see also the provided excel file at the end of this section):
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
The company is considering hiring a business analyst to prepare for a final decision. If the company
employs the analyst, deciding which project to develop will not be made until the analyst presents a
survey. However, the analyst requests an upfront payment for the study in the amount of Z. The
probability of the survey results being positive or negative is i and k.
Below are the 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
Completion of 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).
Students have to prepare and submit a managerial report and answer the questions:
1. Which one of the three development projects should be selected?
2. Should the company use the probabilities provided by the business analyst?
Submission Requirements
Task 2-0 (one grading point): Students should structure and present their Assignment 2 as a Managerial
Report. The expected length of the main body (tasks 2-1 to 2-4) is up to 3 pages in APA format, excluding
the 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). Students
have to submit two documents: (i) a Managerial Report (word file) and (ii) an excel file with completed
worksheets for each one of the tasks below.
Task 2-1 (two grading points): Prepare payoff tables and develop a sketch of a decision tree for this
problem (identify the events and decision nodes; don't show probabilities and EMVs on your drawing of
the decision tree).
Task 2-2 (two grading points): Given the probability of all three economic conditions and using expected
monetary values (EMVs), calculate EMVs for each node and answer the questions: (i) What's the EMV
for not hiring a business analyst and the EMV for hiring a business analyst? (ii) What is your
recommendation for the final decision: to consider or not the probabilities, as given by the business
analyst?
Tasl 2-3 (two grading points): Use sensitivity analysis to define how sensitive your decision is to the
probability range concerning the survey results, positive and negative, which might affect the decision
already made in Task 2-2. Draw the sensitivity chart, and find the probability for the cross point between
the decision option (i) to use only the possibilities, as defined by the management of the real estate
company, or (ii) to accept the probabilities of survey results positive and survey results negative, as
given by the business analyst.
Task 2-4 (two grading points): Apply the software application Excel Add-Ins TreePlan (use one of the V-
PCs of the MET V-LABs) to construct a decision tree with payoffs, probabilities, and EMVs.
Task 2-5 (one grading point): Prepare an executive summary. Hint: complete this task after completing
tasks 2-1 to 2-4.
