Sign In
Not register? Register Now!
Essay Available:
Pages:
3 pages/β‰ˆ825 words
Sources:
2 Sources
Style:
APA
Subject:
Business & Marketing
Type:
Essay
Language:
English (U.S.)
Document:
MS Word
Date:
Total cost:
$ 14.58
Topic:

Expected Value and Decision Making

Essay Instructions:

Scenario: You are an entrepreneur that has several business investments in real estate, restaurants, and retail stores. You are looking for your next investment opportunity for you and your private equity investment company. You have found two possible alternatives to invest in that will payoff in the next 10 years. Here are the descriptions of the two options.

Option A: Real estate development. This is a risky opportunity with the possibility of a high payoff, but also with no payoff at all. You have reviewed all of the possible data for the outcomes in the next 10 years and these are your estimates of the Net Present Value of the cash flow and probabilities.

High NPV: $5 million, Pr = 0.5

Medium NPV: $2 million, Pr = 0.3

Low NPV: $0, Pr = 0.2

Option B: Retail franchise for Just Hats, a boutique type store selling fashion hats for men and women. This also is a risky opportunity but less so than option A. It has the potential for less risk of failure, but also a lower payoff. You have reviewed all of the possible data for the outcomes in the next 10 years and these are your estimates of the Net Present Value of the cash flow and probabilities.

High NPV: $3 million, Pr = 0.75

Medium NPV: $2 million, Pr = 0.15

Low NPV: $1 million, Pr = 0.1

Assignment

Develop an analysis of these two investments. Use expected value to determine which of these you should choose. Do your analysis in Excel.

Write a report to your private investment company and explain your analysis and your recommendation. Provide a rationale for your decision.

Upload both your written report and Excel file to the SLP 2 Dropbox.

BONUS: If these two options could be made to be equal, what would have to change in the payoffs in Option A to make it equal to Option B (not the investment amount)?

SLP Assignment Expectations

Analysis

  • Accurate and complete analysis in Excel.

Written Report

  • Accurate and complete review of the situation.
  • Accurate and complete discussion of the analysis.
  • Accurate and complete Recommendation
  • Accurate and complete explanation of the rationale and logic.

 

Essay Sample Content Preview:

Expected value and decision making: stew bus520-mod2-slp
Name
Course
Instructor
Date
Accurate and complete analysis in Excel
Calculations on expected value
Real estate developmentExpectedNPVF(x)ValueHigh5,000,0000.52500000Medium2,000,0000.3600000Low00.20Total3100000Retail franchise for Just HatsExpectedNPVF(x)ValueHigh3,000,0000.752250000Medium2,000,0000.15300000Low1,000,0000.1100000Total2650000
The expected value is E(X) = x1p1 + x2p2 + x3p3 + . . . + xnpn.
X is the outcome
P is the probability
A] Review of the situation
The analysis on the expected value takes into account the NPV for the three scenarios and the probability. Aggregating the results for the three cases and then comparing results then gives a clearer picture on choosing the better option between the two. The expected value is dependent on the gains/ losses as well as the expected probability, meaning high probabilities for higher present values and minimal losses would likely result to a higher expected value. The three scenarios of gains have unique probabilities, and the probability that the three will occur is 1.
As such, the expected value (EMV) criterion will highlight on the probability- weighted average of all the possible outcomes (Drury, 2006).. The optimal decision making is then tied to the alternative that yields the higher expected value between the Real estate development and Retail franchise for Just Hats. There are two decision alternatives, and the decision analysis provides the method for determining the optimal strategy. The payoff and probability are then beneficial towards applying the decision criterion of the highest expected value (Drury, 2006). In any case, this is a decision making scenario under risk represented by the probabilities in the High NPV medium NPV and low NPV.
B] Discussion of the analysis
Given the need to assess the viability of two different investment options, the expected value provides a better measure to compare results than simply looking at the three scenarios for each option alone. Even though, the low probability in Real estate development is 0, one cannot simply assume that this option is not viable, since the other two outcomes can compensate for this low payoff. In any case, the expected value of this option is higher and the investment opportunity is chosen depending on the expected value. Just like the decision criteria for the Net Present Value to choose the highest positive NPV, the decision criteria for the expected value ...
Updated on
Get the Whole Paper!
Not exactly what you need?
Do you need a custom essay? Order right now:
Order

πŸ‘€ Other Visitors are Viewing These APA Essay Samples:

HIRE A WRITER FROM $11.95 / PAGE
ORDER WITH 15% DISCOUNT!
Order Now