Question

QUESTION ONE

Platinum Real Estate Consulting Group, owner of a number of properties dotted around Lusaka is faced with a choice of:

1. A large-scale investment (A) to improve its flats. This could produce a substantial pay-off in terms of increased revenue net of costs but will require an investment of K1, 400,000. After extensive market research it is considered that there is a 40% chance that a pay-off of K2, 500,000 will be obtained, but there is a 60% chance that it will be only K800, 000.
2. A smaller scale project (B) to re-decorate its premises. At K500, 000 this is less costly but will produce a lower pay-off. Research data suggests a 30% chance of a gain of K1, 000,000 but a 70% chance of it being only K500, 000.
3. Continuing the present operation without change (C). It will cost nothing, but neither will it produce any pay-off. Clients will be unhappy and it will become harder and harder to rent the flats out when they become free.

REQUIRED:

1. Draw the decision tree representing the options open to Platinum Real Estate Consulting Group.
2. Calculate the expected values.                                                           
3. Calculate the net expected value.                                                                          
4. How will a decision tree help the taking of the decision?      

Answer 1

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Answer