If the estimated cost of the kitchen project is $10,000, if the remodeled kitche
ID: 334264 • Letter: I
Question
If the estimated cost of the kitchen project is $10,000, if the remodeled kitchen adds $12K in a good market and $11K in a moderate market to the future selling price, and with the chance of having a good market in the future being 0.4, did the Nathans make the right decision? Decide whether the new addition project is a good project using the data below Month 0 Month 1 Month 2 Month 3Month 4 $1,500 $2,500 $3,000 $2,500 $1,500 $1,000 $900 $1,000 $1,000 $800 Benefits as Social Venue Benefits of Satisfaction $800 Benefits of Having Good Time $- $1,000 Cost of Project $14,000 $500 Cost of Furniture $1,000 - Cost of Socialization $150 $200 $300 $200Explanation / Answer
Month 0
Month 1
Month 2
Month 3
Month 4
Benefits as Social Venue
$
$1500
$2500
$3000
$2500
Benefits of Satisfaction
$
$1500
$1000
$900
$800
Benefits of having a good time
$
$1000
$1000
$800
$1000
Cost of Project
$14,000
$500
$
$
$
Cost of Furniture
$
$1000
$
$
$
Cost of Socialization
$150
$200
$300
$200
Expected payoff before the project= p* Expected payoff in good market+ (1-p)* Expected payoff in moderate market
p= Probability of good market= 0.4
Expected payoff before the project= 0.4*2+0.6*1= 1.4K= $1400
Actual payoff= (Benefits as Social Venue + Benefits of Satisfaction + Benefits of having a good time)- (Cost of Project + Cost of Furniture + Cost of Socialization)
Month-wise actual payoffs:
Month 0= -14000$
Month 1= (1500$ + 1500$ + 1000$)-(500$ + 1000$ +150$) = 2350$
Month 2 = (2500$+ 1000$ + 1000$ )- (200$) = 4300$
Month 3 = (3000$+ 900$ + 800$ )- (300$) = 4400$
Month 4= (2500$+ 800$ + 1000$ )- (200$) = 4100$
Net payoff= -14000$ + 2350$ + 4300$ + 4400$ + 4100$ = 1150$
Assumption: PVIF is 0
Since the expected payoff is greater than 0 the decision is right to invest in kitchen project
Month 0
Month 1
Month 2
Month 3
Month 4
Benefits as Social Venue
$
$1500
$2500
$3000
$2500
Benefits of Satisfaction
$
$1500
$1000
$900
$800
Benefits of having a good time
$
$1000
$1000
$800
$1000
Cost of Project
$14,000
$500
$
$
$
Cost of Furniture
$
$1000
$
$
$
Cost of Socialization
$150
$200
$300
$200