A construction company is considering bidding on a project to build a new office building. The company
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Question:
A construction company is considering bidding on a project to build a new office building. The company estimates that the project will cost $20 million to complete and that they will be able to sell the building for $30 million when completed. However, there is a risk that the actual costs may be higher than expected, and the actual selling price may be lower than expected. The following information is available:
- The probability that the actual cost of the project will be $25 million is 30%.
- The probability that the actual cost of the project will be $20 million is 50%.
- The probability that the actual cost of the project will be $15 million is 20%.
- The probability that the actual selling price of the building will be $28 million is 40%.
- The probability that the actual selling price of the building will be $30 million is 50%.
- The probability that the actual selling price of the building will be $32 million is 10%.
The company's required rate of return for this project is 12%. Calculate the expected value, standard deviation, and coefficient of variation for this investment. Based on these calculations, should the company bid on this project?
Related Book For
Quantitative Methods for Business
ISBN: 978-0324651751
11th Edition
Authors: David Anderson, Dennis Sweeney, Thomas Williams, Jeffrey cam
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