Quantitative Analysis: Retail development probabilities

Anonymous
timer Asked: Feb 19th, 2019
account_balance_wallet $25

Question Description

Must attach excel document and fill out chart

A real estate developer is assessing an area for future retail development. She believes it is only profitably to develop a retail outlet in this area if a medical facility or industrial facility is built in the general vicinity within the next 5 years. Typically industrial facilities precede the development of medical facilities. Using this knowledge and some market research, she has arrived at the following probabilities. The overall probability that an industrial facility will be built in the area in the next 5 years is 30%. If the industrial facility is built, she believe the probability that the medical facility is built is 40%. If the industrial facility is not built, she believes the probability that the medical facility will be built goes down to 20%. What is the probability of the following events?

a) neither am industrial facility or medical facility is built

b) only an industrial facility is built

c) only a medical facility is built

d) both an industrial facility and a medical facility is built

e) She also has arrived at the following net present values for her retail development project based on the 4 events above. Given these outcomes and the probabilities you calculated above, what is her expected NPV? Should she do the project?

EVENTNPV
neither a industrial facility or medical facility is built-10 Million
only an industrial facility is built5 million
only a medical facility is built3 million
both an industrial facility and a medical facility is built20 million

f. Our real estate developer has learned that the probability that an industrial facility is built in the next 5 years has risen from 30% to 90%. Based on this, rework the problem and provide the new expected NPV of the project. Should she do the project?

# 1 What is the probability of the following events

a) neither am industrial facility or medical facility is built

b) only an industrial facility is built

c) only a medical facility is built

d) both an industrial facility and a medical facility is built

e) what is her expected NPV? Should she do the project?

f) scenario 2: what is her expected NPV? Should she do the project?

Tutor Answer

pallveechem123
School: UC Berkeley

here is solution.Kindly ask if any doubt.

Quantitative Analysis
a) Neither an industrial facility nor medical facility is built
Probability of an industrial facility will not be built in the area in the next 5 years = 0.70
Probability that the medical facility will not be built = 0.80
Prob. that neither an industrial facility nor medical facility is built = 0.8  0.7 = 0.56
b) Only an industrial facility is built

(

Prob. that only an industrial facility is built= P I  M
Prob. that there is Industrial facility = P(I ) = 0.30

)

Prob. that medical facility is not built when there is Industrial facility = P( M / I ) = 0.60

(

)

M 
P I  M = P   P(I ) = 0.60  0.30 = 0.18
 I 
c) Only a medical facility is built
Prob. that medical facility is built when there is not Industrial facility = P( M / I ) = 0.20
Prob. that there is not Industrial facility = P(I ) = 0.70

(

)

()

M 
P I  M = P   P I = 0.20  0.70 = 0.14
 I 

d) Both an industrial facility and a medical facility is built
M 
P(I  M ) = P   P(I ) = 0.40  0.30 = 0.12
 I 
e) She also has arrived at the following net present values for her retail development
project based on the 4 events above. Given these outcomes and the probabilities you
calculated above, what is her expected NPV? Should she do the project?

Net Present Value (NPV)
= −10  P I  M + 5  P M  I + 3  P M  I + 20  P(M  I )

(

)

(

)

(

= −10  0.56 + 5  0.18 + 3  0.14 + 20  0.12
= −1.88 million
As NPV is negative, she should not do this project.

)

f) Our real estate developer has learned that the probability that an industrial
facility is built in the next 5 years has risen from 30% to 90%. Based on this,
rework th...

flag Report DMCA
Review

Anonymous
Good stuff. Would use again.

Similar Questions
Hot Questions
Related Tags
Study Guides

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors