Section B: Background for Q5-8 (35 points)

Donald and Melania have left their jobs in DC and are moving back to Florida. They have a family home there, but it is currently under renovation. Against Melanias advice, Donald decided to start this major renovation project a year ago since he was expecting to stay in his job in DC for much longer. Plus, the lingering supply chain disruptions caused by the pandemic has been causing various delays in the renovation project. As a result, as Donald and Melania return to Florida, they are unsure when they will be able to move into their house.

Ron, the project manager, advised the couple that the following tasks still need to be completed:

(i) Waiting for the new kitchen furniture to be delivered:

The supplier advises that the items are being shipped from China, where the shipping schedule was disrupted during Covid times. But based on recent orders, the supplier believes that there is 95% chance delivery will take place between 10 to 30 days from now.

(ii) Waiting for the new bathroom sanitary ware to be delivered:

Ron was able to pressure the supplier to guarantee delivery in the next 10 to 20 days. Though the exact delivery date is unknown, the supplier says that the most likely date is in 14 days.

(iii) Installing new kitchen furniture:

This can only start after the kitchen furniture has been delivered. The installation should take between 2 to 4 days.

(iv) Installing new bathroom:

This can only start after the sanitary ware has been delivered. However, the plumbers have a tight schedule. If the sanitary ware is delivered within the next 12 days or less, they can start the installation straight away and complete in 2 more days; however, if delivery takes longer, they can only start the installation after another weeks delay since they have to work on other jobs.

(v) Safety checks for electrical systems:

Given the complexity of the system Donald has chosen to install, safety checks on the 8 components must be completed sequentially, i.e., testing on the second component can only start after the first one is passed (or any faults are fixed). Ron thinks that there is a 15% chance that faults are found in each of the 8 components, and each fault will cause one day of delay to fix.

Melania has found a nice beachside house for temporary rental. The rent is $5000 per week (7 days) on a weekly contract, i.e., they can choose to renew or exit the lease at the end of each week. But if they sign on a monthly basis (i.e., they can renew or exit after every 30 days), the landlord offers a discounted rent of $18000 per month (30 days). Despite the cheaper cost, Melania is worried about the risk of getting tied up in a monthly contract if the house is ready for move in before the end of the month, considering the uncertainty in the completion time of the renovation project.

Question 5

Build a simulation model with @Risk to evaluate Donald and Melanias temporary housing costs. Run the simulation with 1000 iterations. Upload your Excel file.

Question 6

Based on your simulation results, how much will they be better off on average by rental on a monthly basis over weekly? Enter the numerical value without currency symbols (e.g., enter 2345.56 instead of $2345.56).

Question 7

Based on your simulation results and assuming they are risk neutral, would you advise them to rent on a monthly or weekly basis? Why? [20-30 words expected]

Question 8

Based on your simulation results and assuming they are risk averse, would you advise them to rent on a monthly or weekly basis? Why? [20-30 words expected]