A company plans to do a commercial development on a property. The property details are as follows
Question:
A company plans to do a commercial development on a property. The property details are as follows
– Asking price for the property is Kshs 300,000 .
– Construction cost is kshs 500,000.
– Selling price is approximated at kshs950,000.
– Variance application costs kshs30,000 in fees and expenses
– There is only 40% chance that the variance will be approved.
– If they purchase the property and the variance is denied, the property can be sold for a net return of kshs260,000.
– A three month option on the property costs kshs20,000, which will allow the company to apply for the variance.
– A consultant can be hired for kshs5000.
– The consultant will provide an opinion about the approval of the application
– y (Consultant predicts approval | approval granted) = 0.70
– y (Consultant predicts denial | approval denied) = 0.80
The company wishes to determine the optimal strategy
– Hire/ not hire the consultant now,
Other decisions follow sequentially
Construct a Decision Tree to help the company make an optimal decision.
Cost Management Measuring Monitoring and Motivating Performance
ISBN: 978-0470769423
2nd Canadian edition
Authors: Leslie G. Eldenburg, Susan Wolcott, Liang-Hsuan Chen, Gail Cook