Thom DeBusk, an architect, is considering buying, restoring, and reselling a home in the Draper-Preston historic district of Blacksburg, VA. The cost of the home is $240,000 and Thom believes it can be sold for $450,000 after being restored. Thom expects he can sell the house as soon as the restoration is completed and expects to pay $1,500 a month in finance charges from the time he purchases the house until it is sold. Thom has developed two sets of plans for the restoration. Plan A will cost $125,000 and require 3 months to complete. This plan does not require changes to the front of the house. Plan B is expected to cost $85,000 and require 4 months of work. This plan does involve changes to the front of the house-which will require the approval of the town's historic preservation committee. Thom expects the approval process for plan B to take 2 months and cost about $5,000. Thom thinks there is a 40% chance the historic preservation committee will approve this design. Thom plans to buy the home immediately but cannot decide what he should do next. He could immediately proceed with restoration plan A or he could start immediately with restoration plan B. Of course, if he starts immediately with plan B, he will not know for 2 months whether the historic preservation committee approves of this plan. If they do not approve it, he will have to start over and implement plan A instead. Starting over with plan A would cost an additional $20,000 over plan A's normal cost and add an additional month to plan A's normal completion schedule. Alternatively, Thom can hold off implementing either plan until he knows the outcome of the historic planning committee's decision. a. Create a decision tree for this problem. b. What set of decisions should Thom make if he follows the maximum EMV criterion?
Thom DeBusk, an architect, is considering buying, restoring, and reselling a home in the Draper-Preston historic district of Blacksburg, VA. The cost of the home is $240,000 and Thom believes it can be sold for $450,000 after being restored. Thom expects he can sell the house as soon as the restoration is completed and expects to pay $1,500 a month in finance charges from the time he purchases the house until it is sold. Thom has developed two sets of plans for the restoration. Plan A will cost $125,000 and require 3 months to complete. This plan does not require changes to the front of the house. Plan B is expected to cost $85,000 and require 4 months of work. This plan does involve changes to the front of the house-which will require the approval of the town's historic preservation committee. Thom expects the approval process for plan B to take 2 months and cost about $5,000. Thom thinks there is a 40% chance the historic preservation committee will approve this design. Thom plans to buy the home immediately but cannot decide what he should do next. He could immediately proceed with restoration plan A or he could start immediately with restoration plan B. Of course, if he starts immediately with plan B, he will not know for 2 months whether the historic preservation committee approves of this plan. If they do not approve it, he will have to start over and implement plan A instead. Starting over with plan A would cost an additional $20,000 over plan A's normal cost and add an additional month to plan A's normal completion schedule. Alternatively, Thom can hold off implementing either plan until he knows the outcome of the historic planning committee's decision. a. Create a decision tree for this problem. b. What set of decisions should Thom make if he follows the maximum EMV criterion?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Answering all questions compulsory....
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education