The probability of a favorable pilot study

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Reference no: EM13810827

C&A has to decide whether to build a new shopping center, or build the new shopping center after a pilot study. If the new shopping center is successful, C&A will make a profit of $300 million. If the new shopping center fails, C&A will lose $150 million. C&A estimates that there is 30% chance that the new shopping center will fail. The other option is to conduct a pilot study and then decide whether or not to build. The pilot study will cost $10 million. C&A will build a new shopping center only if the result of the pilot study is favorable. The probability of a favorable pilot study is 60%. At this time, there will be an 80% chance that the new shopping center will make a profit of $400 million and 20% chance that there will be a loss of $100 million. What decision should be made and what is the expected value of that decision?

    Build a new shopping center, $165 million.
    Do a pilot study then decide, $170 million.
    Build a new shopping center, $170 million.
    Do a pilot study then decide, $165 million.
    None of the above

 

 

Reference no: EM13810827

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