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Real Estate Acquisition Analysis Guide

The document analyzes purchasing parcels of land A and B under uncertainty about whether an airport will be built. It evaluates the decisions using various criteria like maximax, maximin, minimax regret, expected value, and expected regret to determine the optimal decision. Purchasing only location B has the highest expected value. The value of perfect information is calculated to be $8.4 million.

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MUHAMMAD WAQAS TARIQ
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78 views12 pages

Real Estate Acquisition Analysis Guide

The document analyzes purchasing parcels of land A and B under uncertainty about whether an airport will be built. It evaluates the decisions using various criteria like maximax, maximin, minimax regret, expected value, and expected regret to determine the optimal decision. Purchasing only location B has the highest expected value. The value of perfect information is calculated to be $8.4 million.

Uploaded by

MUHAMMAD WAQAS TARIQ
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd

Data

Magnolia Inns
Real Estate Acquisition Analysis

Parcel of Land Near Location


A B
Current purchase price $18 $12

Present value of future cash flows if hotel and


$31 $23
airport are built at this location

Present value of future sales price of parcel if


$6 $4
the airport is not built at this location

(Note: All values are in millions of dollars.)

Page 1
Payoffs

A B C D
1
Payoff Matrix
2
3 Land Purchased Airport is Built at Location
4 at Location(s) A B
5 A $13 ($12)
6 B ($8) $11
7 A&B $5 ($1)
8 None $0 $0
9
10
11
12
13
14
15
16

Page 2
Maximax

Payoff Matrix &


Maximax Decision Rule
Land Purchased Airport is Built at Location
at Location(s) A B MAX
A $13 ($12) $13 <--maximum
B ($8) $11 $11
A&B $5 ($1) $5
None $0 $0 $0

Page 3
Maximin

Payoff Decision
Maximin Matrix & Rule
Maximin Decision Rule
Land Purchased Airport is Built at Location
at Location(s) A B MIN
A $13 ($12) ($12)
B ($8) $11 ($8)
A&B $5 ($1) ($1)
None $0 $0 $0 <--maximum

Page 4
Minimax Regret

Regret Matrix &


Minimax Regret Decision Rule
Land Purchased Airport is Built at Location
at Location(s) A B Max
A $0 $23 $23
B $21 $0 $21
A&B $8 $12 $12 <--minimum
None $13 $11 $13

Page 5
Expected Value

Payoff Matrix &


EMV Decision Rule
Land Purchased Airport is Built at Location
at Location(s) A B EMV
A $13 ($12) ($2.0)
B ($8) $11 $3.4 <--maximum
A&B $5 ($1) $1.4
None $0 $0 $0.0

Probability 0.4 0.6

Page 6
Expected Value

12
10
8
6
4
2
0
0 2 4 6 8

Page 7
Expected Value

4 6 8 10 12

Page 8
Expected Regret

Regret Matrix &


EOL Decision Rule
Land Purchased Airport is Built at Location
at Location(s) A B EOL
A $0 $23 $13.8
B $21 $0 $8.4 <--minimum
A&B $8 $12 $10.4
None $13 $11 $11.8

Probability 0.4 0.6

Page 9
EMV Decision Table

Payoff Matrix & $12.0


EMV Decision Rule
$10.0
Land Purchased Airport is Built at Location

EMV
$8.0
at Location(s) A B EMV
A $13 ($12) ($2.0) $6.0
B ($8) $11 $3.4 <--maximum
$4.0
A&B $5 ($1) $1.4
None $0 $0 $0.0 $2.0 A B
A&B None
$0.0
Probability 0.4 0.6 Prob. of Location A
0.0 0.2 0.4 0.6 0.8

EMV A EMV B EMV A&B EMV None


Prob. of Location A ($2.0) $3.4 $1.4 $0.0
0.0 Err:504 Err:504 Err:504 Err:504
0.1 Err:504 Err:504 Err:504 Err:504
0.2 Err:504 Err:504 Err:504 Err:504
0.3 Err:504 Err:504 Err:504 Err:504
0.4 Err:504 Err:504 Err:504 Err:504
0.5 Err:504 Err:504 Err:504 Err:504
0.6 Err:504 Err:504 Err:504 Err:504
0.7 Err:504 Err:504 Err:504 Err:504
0.8 Err:504 Err:504 Err:504 Err:504
0.9 Err:504 Err:504 Err:504 Err:504
1.0 Err:504 Err:504 Err:504 Err:504

Page 10
EMV Decision Table

A B
A&B None

Prob. of Location A
0.4 0.6 0.8 1.0

Page 11
EVPI

Payoff Matrix &


Calculation of EVPI
Land Purchased Airport is Built at Location
at Location(s) A B EMV
A $13 ($12) ($2.0)
B ($8) $11 $3.4 <--maximum
A&B $5 ($1) $1.4
None $0 $0 $0.0

Probability 0.4 0.6

Payoff of decision made


$13 $11 $11.8
with perfect information

EVPI $8.4

Page 12

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