A construction supply company must decide among building a new store, expanding the existing one, or doing nothing. Based on expected value calculations, expanding the existing store is the most advantageous option.
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[...] VE (Construction of a new store) = (3 800 000 * + (600 000 * + (-1 000 000 * = 380 000 + 360 000 - 300 000 = 440,000 = 0.44 million VE (Expansion of the existing store) = (3 000 000 * + (1 000 000 * + (-600 000 * = 300 000 + 600 000 - 180 000 = 720,000 = 0.72 million VE (Do nothing) = (1 000 000 * + * + (-200 000 * = 100 000 - 60 000 = 40,000 = 0.04 million Decision Tree Implementation What is the optimal choice for the company and why? Based on the expected value calculations, the most advantageous option is to expand the existing store. It offers the highest expected value, meaning that on average, it will generate the most value for the company, considering the estimated probabilities for the different states of the economy. [...]
[...] First, the uncertainty factors related to the state of the economy (expansion, stable or recession). We must also consider the decision criteria based on the VANs provided by the analyst. Develop a decision tree for this problem. In our initial decision node: The starting point, represents the decision to be made. In the branches, each of the three possible options (new store, expansion, do nothing) depart from this node. In the chance nodes (At the end of each branch), we introduce nodes representing the different possible states of the economy (expansion, stable, recession). [...]
[...] Financial Project Management - Decision Making, Cash Flow, Investments Assignment Writing Question A construction supply company is considering an expansion to meet demand for its products. It has 3 options: build a new store on a site not far from its current store; expand the existing store, or do nothing at all. The financial analyst estimates that there is a 60% probability of a stable economy, a 10% probability of growth, and a 30% probability of a recession. The Analyst has calculated the following VANs for the 3 options according to the possible scenarios: Solution: In this question, it is a matter of making a decision. [...]
[...] Based on the decision tree we have constructed and the calculations performed, the optimal choice for the company is to expand the existing store. Exercise Assuming the risk-free interest rate is per annum, the market risk premium is per annum, and the market volatility is 12%. A venture fund has an approximate beta of 2.0 based on its cost, a correlation of 0.20 with the market, and an expected return on investment of 22% per annum. The total cost is million at time zero. [...]
