Business Analysis
mathgenuis2021
20201126020943assignment2.docxRunning Head: MET AD 715 Assignment 2 1
Case Problem "Real Estate Development: Select a New Project"
Assignment 2
AD715 Quantitative & Qualitative Decision-Making
Table of Content
1. Executive summary ……………………………………………………………3
2. Managerial Report…….……………………………………..………………...4
2.1 Expected Monetary Value..........................................................................4
2.2 Sensitivity Analysis…………………………………………………………5
3. Appendices..........................................................................................................6
1 Executive summary
The real estate company is considering investing a new project out of three option, an apartment building or an office building or a warehouse building. In preparation for the decision, the company is considering hiring a business analyst. If the company hires the analyst, it would increase a survey fee for the decision regarding which project to develop. For more precise decision-making, we use the support tools to assist us which are decision tree, a sensitivity analysis, and a sensitivity diagram.
After inputting all the necessary information and possible outcomes, the analysis of the support tools showed that it is in the real estate company’s best interest to build the warehouse and not to hire the business analysis. The probability of report results positive does not outweigh the probability of report results negative from the outcome of the business analyst. If the company does hire the business analyst, the expected monetary value also does not outweigh the expected monetary value of choosing to build the warehouse without hiring the analyst.
From the Sensitivity Analysis, it concludes that if probability of report results positive (p) smaller than 0.8337, do not hire the business analyst; if p over 0.8337, hire the business analyst meanwhile the company could utilize the analysis gaining a profit greater than $328,200.
2 Managerial Report
For assessing the Expected Monetary Value (EMV) of not hiring the analyst, we calculate each option with the probability of optimistic realistic and pessimistic condition. For the results we get apartment $281,600, office $208,300, and warehouse $328,200.
Next, subtract the fee for survey $10,000 regarding the report is positive or negative, calculate each potion with the probability of optimistic realistic and pessimistic condition. The results come out as apartment $315,300, office $258,400, and warehouse $359,100 when the report is positive; apartment $122,900, office $62,700, and warehouse $173,300 when the report is negative.
From the value we get above we can know that the optimal EMV of report results positive is $359,100; negative is $173,300. Therefore, we calculate both with probability of report results positive 0.48 and report results negative 0.52. Then we can get the EMV of hiring a business analyst $262,484.
In the conclusion, compare to the EMV of not hiring the analyst $328,200, hiring has a lower EMV $262,484 which means the real estate company would gain a greater profit if they chose the project of build the warehouse and not to hire an analyst.
2.2 Sensitivity Analysis
From the EMV estimate, we get the optimal result as build the warehouse and do not hire the analyst. However, we want to know under what circumstance could we hire the analyst. From the sensitivity analysis, we set a line of do not hire an analyst fixed at $328,200 and a variation line of probability of report result positive (p). We assume that probability is P and probability of report result negative is 1-P. Assuming P equal 0, then we get the point at $173,300 and assuming P equal 1, then we can get the point at $359,100.
From two points, we can get a line which cross the fixed line at $328,200 and the formulate is 173300+185800P=328200. The cross point (p) is 0.83369. Which means that when the probability of report result positive is 0.83369 the outcomes of both hire and not hire is the same as $328,200; when the probability is under 0.83369 the outcomes would lower than $328,200; when the probability is above 0.83369 the outcomes would greater than $328,200.
In the nutshell, if probability of report results positive (p) smaller than 0.83369, company should not hire the business analyst; if (p) equal to 0.83369, both hire or not hire have the same result as $328,200; if (p) over 0.83369, company should hire the business analyst meanwhile it could utilize the analysis gaining a profit greater than $328,200.
3 Appendices
3.1
Decision Tree
3.2 Payoff Table, Sensitivity Analysis and Diagram
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1. If the company does not hire a business analyst: |
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Alternatives |
States of Nature |
EMV |
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Optimistic Conditions |
Realistic Conditions |
Pessimistic Conditions |
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Apartment Building |
410000 |
300000 |
-70000 |
281,600 |
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Office Building |
350000 |
220000 |
-140000 |
208,300 |
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Warehouse |
430000 |
360000 |
-30000 |
328,200 |
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Probability |
0.27 |
0.6 |
0.13 |
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2.1 If the analysis report is positive: |
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Alternatives |
States of Nature |
EMV |
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Optimistic Conditions |
Realistic Conditions |
Pessimistic Conditions |
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Apartment Building |
$400,000 |
$290,000 |
-$80,000 |
315,300 |
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Office Building |
$350,000 |
$220,000 |
-$140,000 |
258,400 |
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Warehouse |
$430,000 |
$360,000 |
-$30,000 |
359,100 |
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Probability |
0.6 |
0.29 |
0.11 |
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2.2 If the analysis report is negative: |
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Alternatives |
States of Nature |
EMV |
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Optimistic Conditions |
Realistic Conditions |
Pessimistic Conditions |
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Apartment Building |
$400,000 |
$290,000 |
-$80,000 |
122,900 |
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Office Building |
$350,000 |
$220,000 |
-$140,000 |
62,700 |
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Warehouse |
$430,000 |
$360,000 |
-$30,000 |
173,300 |
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Probability |
0.23 |
0.25 |
0.52 |
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Sensitivity Analysis
EMV (Hire a business analyst) 0 1 173300 359100 EMV(Do not hire a business analyst) 0 1 328200 328200 Cross point 0.83369214000000003 328200
0.27
Optmistic Conditions
410000
410000
0.6
Apartment BuildingRealistic Conditions
300000
281600300000
0.13
Pessimistic Conditions
-70000
-70000
0.27
Optmistic Conditions
350000
350000
0.6
Do not hire a business analystOffice BuildingRealistic Conditions
3 220000
328200208300220000
0.13
Pessimistic Conditions
-140000
-140000
0.27
Optmistic Conditions
430000
430000
0.6
WarehouseRealistic Conditions
360000
328200360000
0.13
Pessimistic Conditions
-30000
-30000
0.6
Optmistic Conditions
400000
400000
0.29
Apartment BuildingRealistic Conditions
290000
315300290000
1 0.11
328200 Pessimistic Conditions
-80000
-80000
0.6
Optmistic Conditions
350000
350000
0.480.29
Report Results PossitiveOffice BuildingRealistic Conditions
3 220000
359100258400220000
0.11
Pessimistic Conditions
-140000
-140000
0.6
Optmistic Conditions
430000
430000
0.29
WarehouseRealistic Conditions
360000
359100360000
0.11
Pessimistic Conditions
-30000
Hire a business analyst -30000
262484 0.23
Optmistic Conditions
400000
400000
0.25
Apartment BuildingRealistic Conditions
290000
122900290000
0.52
Pessimistic Conditions
-80000
-80000
0.23
Optmistic Conditions
350000
350000
0.520.25
Report Results NegativeOffice BuildingRealistic Conditions
3 220000
17330062700220000
0.52
Pessimistic Conditions
-140000
-140000
0.23
Optmistic Conditions
430000
430000
0.25
WarehouseRealistic Conditions
360000
173300360000
0.52
Pessimistic Conditions
-30000
-30000
