Question
A construction company is considering bidding on a project to build a new office building. The company estimates that the project will cost $20 million
A construction company is considering bidding on a project to build a new office building. The company estimates that the project will cost $20 million to complete and that they will be able to sell the building for $30 million when completed. However, there is a risk that the actual costs may be higher than expected, and the actual selling price may be lower than expected. The following information is available:
- The probability that the actual cost of the project will be $25 million is 30%.
- The probability that the actual cost of the project will be $20 million is 50%.
- The probability that the actual cost of the project will be $15 million is 20%.
- The probability that the actual selling price of the building will be $28 million is 40%.
- The probability that the actual selling price of the building will be $30 million is 50%.
- The probability that the actual selling price of the building will be $32 million is 10%.
The company's required rate of return for this project is 12%. Calculate the expected value, standard deviation, and coefficient of variation for this investment. Based on these calculations, should the company bid on this project?
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