The ceo of the think-big development

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Reference no: EM131104561

Refer to the financial risk analysis example presented at the end of Sec. 22.6, including its results shown in Fig. 22.14. Think-Big management is quite concerned about the risk profile for the proposal. Two statistics are causing particular concern. One is that there is nearly a 20 percent chance of losing money (a negative NPV). Second, there is a 10 percent chance of losing at least a full third ($6 million) as much as the mean gain ($18 million). Therefore, management is wondering whether it would be more prudent to go ahead with just one of the two projects. Thus, in addition to option 1 (the proposal), option 2 is to take 16.5 shares of the hotel project only (so no shares of the shopping center project) and option 3 is to take 13.1 shares of the shopping center option only (so no shares of the hotel project). Management wants to choose one of the three options. Risk profiles now are needed to evaluate the latter two.

(a) Generate risk analysis outputs similar to those in Fig. 22.14 for option 2 after performing a simulation with 1,000 iterations for this option.

(b) Repeat part (a) for option 3

(c) Suppose you were the CEO of the Think-Big Development Co. Use the results in Fig. 22.14 for option 1 along with the corresponding results obtained for the other two options as the basis for a managerial decision on which of the three options to choose. Justify your answer.

Fig. 22.14

Reference no: EM131104561

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