What is the maximum cost of the impact study

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Real Estate Development: A real estate developer wishes to build a new development. Regulations require an environmental impact study that will yield an "impact score," which is an index number based on the impact the development will likely have on such factors as traffic, air quality, and sewer and water usage. The developer, who has lots of experience, knows that the score will be no less than 40 and no more than 70. Furthermore he knows that any score between 40 and 70 is as likely as any other score between 40 and 70 (use continuous values). The local government's past behavior implies that there is a 35% chance that it will approve the development if the impact score is less than 50 and a 5% chance that it will approve the development if the score is between 50 and 55; if the score is greater than 55 then the project will surely be halted. The value of the development to the developer is $20 million. Assuming that the developer is risk neutral, what is the maximum cost of the impact study such that it is still worthwhile for the developer to have it conducted?

Reference no: EM131246649

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