Question

Alisha Tomlinson is a property owner and is faced with three choices:

A large-scale investment to improve her apartments. After extensive market research it is considered that there is a 51% chance that a pay-off of $3,100,000 will be obtained, but there is a 49% chance that it will be only $748,000. This could produce a substantial pay-off in terms of increased revenue net of costs but will require an investment of $1,945,000. 17

A smaller scale project to re-do her landscape. Research data suggests a 75% chance of a gain of $1,500,000 but a 25% chance of it being only $525,000. This alternative will require an investment of $1,350,000.

Continuing the present operation without change. It will cost nothing, but neither will it produce any pay-off. Tenants will be unhappy and it will become harder and harder to rent the apartments out when they become free.

Will Alisha make net profit or loss if she selects to invest in improving her apartments. What will be the expected profit/loss (EMV):

Answer 1

Alisha Tomlinson is expected to make a net profit of $2,520 by investing in the improvement of her apartments. This is based on the expected monetary value (EMV) calculation considering the different payoffs and their associated probabilities.

Step-by-step explanation:

To determine whether Alisha Tomlinson will make a net profit or loss by investing in improving her apartments, we need to calculate the expected monetary value (EMV) of the project. The EMV is found by multiplying the possible outcomes by their respective probabilities and summing those values. Here are the calculations:

• High payoff: 0.51 (probability) × $3,100,000 (payoff) = $1,581,000
• Low payoff: 0.49 (probability) × $748,000 (payoff) = $366,520

The sum of these is the total expected payoff: $1,581,000 + $366,520 = $1,947,520. To find the expected profit, we subtract the investment cost:

Expected profit = Total expected payoff - Investment cost

Expected profit = $1,947,520 - $1,945,000 = $2,520

The result is an expected profit of $2,520, so if Alisha invests in the large-scale improvement project, she is expected to make a net profit, although quite marginal compared to her total investment.