Construction Project Writing Assignment: Payoff Table (Research Paper Sample)

Construction Project
Name:
Institution:
Table of Contents TOC \o "1-3" \h \z \u Executive Summary PAGEREF _Toc465015997 \h 3Introduction PAGEREF _Toc465015998 \h 4Payoff Table PAGEREF _Toc465015999 \h 4Decision Tree PAGEREF _Toc465016000 \h 5Expected Monetary Value PAGEREF _Toc465016001 \h 5Conclusion PAGEREF _Toc465016002 \h 6References PAGEREF _Toc465016003 \h 7Appendix PAGEREF _Toc465016004 \h 8Decision Tree PAGEREF _Toc465016005 \h 8
Executive Summary
Bill Holiday wants to invest his few resources in a construction project. Due to scarcity of his resources, he wants to make an optimum investment decision which will yield best results. Holiday has committed $3,000 for the purpose of carrying out the research to find out the probable results he will get from his investment during the favorable and unfavorable market conditions. To determine whether he should build a quadplex or a duplex, Expected Monetary Value (EMV) under various market conditions have been calculated. The EMV has been extended to find out the expected value of sample information (EVSI). Based on the EVSI, I recommend Holiday to build a quadplex without carrying out the research.
Introduction
Investment decisions, even entirely straightforward ones, can be hard to make in light of the fact that their consequences are frequently not certain. This is an unavoidable truth for most managers, who regularly confront circumstances like the one Bill Holiday is facing: the decision of whether to build a quadplex apartment, construct a duplex building or do nothing. Each of these choices postures clear choices but murky outcomes. But with the decision tree and the payoff table, a project manager can be able to find the maximum expected value from each decision and at the same time minimize the expenses. Therefore the purpose of this study is to identify the best decision which Holiday needs to make to minimize costs and reduce expenses with the help of the decision tree and the payoff table.
Payoff Table
A payoff table is used to summarize the positive and negative returns of various decisions made by an investor in tabular design. The table shows the decisions which are under the control of the decision maker and choices which are beyond their control. (Camm, 2016). Based on the results from the research results, investor will earn $15,000 under favorable and -$20,000 during adverse market conditions if he settles for quadplex building. Also, Mr. Holiday will get $5,000 during favorable and -$10,000 in the unfavorable market conditions in case he decides to build duplex building. On the other hand, if the investor decides to carry out the project without additional information, the probability of a favorable rental market will be 0.7 while the likelihood of unfavorable rental market will be 0.3. In the event of favorable additional information, the favorable market income will also add up to 0.9. On the other hand, in the case of unfavorable additional information, the rental income will reduce to 0.4

State of nature

EMV


Alternative

Favorable market

Unfavorable market


Quadplex

15,000

-20,000

4,500

Duplex

5,000

-15,000

500

Do nothing

0

o

0

Probability

0.7

0.3






Decision Tree
Decision tree is the schematic form of a tree which shows possible results of making a particular investment decision. The decision tree shown in Appendix consists of 5 nodes. Decision tree is most preferred since their results are easy to interpret. (Damodaran, 2012). The nodes are circular in shape representing the events and 3 squares representing the dec...