Determine the expected value of perfect information

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Place-Plus, a real estate development firm is considering several alternative development projects. These include building and leasing an office park, purchasing a parcel of land and building an office building to rent, buying and leasing a warehouse, building a strip mall, and building and selling condominiums. The financial success of these projects depends on interest rate movement in the next 5 years. The various development projects and their 5-year financial return (in $1,000,000s) given that interest rates will decline, remain stable, or increase, are shown in the following payoff table. Place-Plus real estate development firm has hired an economist to assign a probability to each direction interest rates may take over the next 5 years. The economist has determined that there is a .50 probability that interest rates will decline, a .40 probability that rates will remain stable, and a .10 probability that rates will increase.

a. Using expected value, determine the best project.

b. Determine the expected value of perfect information.

Project                    Decline          Interest Rate Stable         Increase

Office park                $0.5                     $1.7                             $4.5

Office building           1.7                        1.9                                2.5

Warehouse               1.7                        1.4                                1.0

Mall                           0.7                        2.4                                3.6

Condominiums          3.2                       1.5                               0.6

Reference no: EM13756617

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