The Hope Development Firm (HGF) needs a permit from the city of Ottawa, Ontario, in order...

 

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The Hope Development Firm (HGF) needs a permit from the city of Ottawa, Ontario, in order to build a shopping center on a piece of land. The price of buying the land is $800,000. HGF estimates that it can construct the shopping center for an additional $700,000 and sell the completed center for approximately $2,000,000. A permit application costs $30,000 in fees and expenses, and there is only a 30% chance that the permit will be approved by the city of Ottawa. Regardless of the outcomes, the permit process takes two months. If HGF purchases the property and the permit is denied, the company will sell the property for $750,000. HGF has also another alternative: purchase a three-month option on the property for $40,000, which would allow it to apply for a permit, and then buy the land if the permit is granted at the same price as before ($800,000) in order to construct the shopping center. HGF can also decide on not to proceed with this project (do nothing). For $5000 an urban planning consultant can be hired to study the situation and render an opinion as to whether the permit will be approved or denied. There is 0.6 probability that the consultant will predict denial of the permit, but even if the consultant predicts denial, there is a 10% chance that the permit will be granted. If the consultant predicts approval, there is still a 20% chance that the consultant prediction is wrong. Note that these are revised/posterior probabilities. (d) Draw the decision tree for this problem that will help HGF determine the optimal strategy regarding this parcel of property. Make sure that the tree is well labeled, and that you include probabilities and cash flows/payoffs as appropriate. Verbally communicate the decision strategy and its expected Payoff. (Suggestion: keep track of cash/payoff flows in units of $1,000). (17 points). The Hope Development Firm (HGF) needs a permit from the city of Ottawa, Ontario, in order to build a shopping center on a piece of land. The price of buying the land is $800,000. HGF estimates that it can construct the shopping center for an additional $700,000 and sell the completed center for approximately $2,000,000. A permit application costs $30,000 in fees and expenses, and there is only a 30% chance that the permit will be approved by the city of Ottawa. Regardless of the outcomes, the permit process takes two months. If HGF purchases the property and the permit is denied, the company will sell the property for $750,000. HGF has also another alternative: purchase a three-month option on the property for $40,000, which would allow it to apply for a permit, and then buy the land if the permit is granted at the same price as before ($800,000) in order to construct the shopping center. HGF can also decide on not to proceed with this project (do nothing). For $5000 an urban planning consultant can be hired to study the situation and render an opinion as to whether the permit will be approved or denied. There is 0.6 probability that the consultant will predict denial of the permit, but even if the consultant predicts denial, there is a 10% chance that the permit will be granted. If the consultant predicts approval, there is still a 20% chance that the consultant prediction is wrong. Note that these are revised/posterior probabilities. (d) Draw the decision tree for this problem that will help HGF determine the optimal strategy regarding this parcel of property. Make sure that the tree is well labeled, and that you include probabilities and cash flows/payoffs as appropriate. Verbally communicate the decision strategy and its expected Payoff. (Suggestion: keep track of cash/payoff flows in units of $1,000). (17 points).

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