Build a high-priced or moderately priced development

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Reference no: EM13982429

The Carter Construction Company (CCC) is trying to decide whether to build a high-priced or a moderately priced development in the Hagerstown area. Tim Carter, the CEO of the company, has assessed the value of the construction enterprise depends on the short-term state of the economy, which is classified as strong or weak. He has determined the payoff tabel as follows: State of Economy Strong Weak High Priced $750,000 -$300,000 Moderately-Priced $250,000 $175,000 Tim initially assesses the probability of a strong economy to be .45. Tim is contemplating hiring a consultant firm, Morgan's Consultants (MC), which would better determine the short-term state of the economy. Results of MC's analysis would be either favorable or unfavorable to a strong economy. Past data indicates that when the economy was strong, MC's analysis was favorable 80% of the time; and when the economy was weak, MC's results were favorable 25% of the time. The cost of the MC's analysis is $100,000.. a. Determine the optimal strategy for CCC using EMV analysis. b. Determine the optimal strategy if the initial probability of a strong economy is .40. You should use Excel and PHstat to perform your analysis. You must completely explain and clearly interpret your analysis, including any computer output that you produce to assist your analysis.

Reference no: EM13982429

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