Tom Wilson Is the Operations Manager for BiCorp, a Real

question 109

Essay

Tom Wilson is the operations manager for BiCorp, a real estate investment firm. Tom must decide if BiCorp is to invest in a strip mall in a northeast metropolitan area. If the shopping center is highly successful, after tax profits will be $100,000 per year. Moderate success would yield an annual profit of $50,000, while the project will lose $10,000 per year if it is unsuccessful. Past experience suggests that there is a 40% chance that the project will be highly successful, a 40% chance of moderate success, and a 20% probability that the project will be unsuccessful.
a. Calculate the expected value and standard deviation of profit.
b. The project requires an $800,000 investment. If BiCorp has an 8% opportunity cost on invested funds of similar riskiness, should the project be undertaken?

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Definitions:

Accounts Payable Turnover Ratio

A liquidity ratio that measures how many times a company pays off its suppliers over a period.

Accounts Payable

Money owed by a business to its suppliers or creditors for goods or services received.

Inventory

The raw materials, work-in-process products, and finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale.

Interest-Bearing Note

A debt instrument that pays interest to the holder until the maturity date, at which point the principal is repaid.