A construction company is considering bidding on a new project. The project has a budget of $10,000,000
Question:
A construction company is considering bidding on a new project. The project has a budget of $10,000,000 and is expected to take two years to complete. The company estimates that it will cost $8,000,000 to complete the project, and they expect to make a profit of $2,000,000. However, they are concerned about the risks associated with the project. There is a 25% chance that they will experience delays due to unforeseen circumstances, which will result in a cost increase of $1,000,000 per year. In addition, there is a 15% chance that the project will be cancelled, resulting in a loss of $500,000 in sunk costs. The company estimates that the project will have a salvage value of $500,000 if it is cancelled. Calculate the expected value and standard deviation of the profit for the project, and provide a recommendation to the company based on your calculations.
Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe