Find the Expected Value of Perfect Information

question 13

Multiple Choice

Find the expected value of perfect information.
-A land owner is considering a community development project in the southeastern
u.S. He is faced with two alternatives: (1) build detached homes in a planned retirement
Community or (2) build a smaller townhouse / condominium complex. Mortgage interest
Rates will affect his outcomes and the payoff (in $ millions) table is shown below. If the
Probabilities for future mortgage interest rates going up, staying about the same, and
Going down are .35, .50 and .15, respectively, the expected value of perfect information is

• A) $2.5 million
• B) $3.625 million
• C) $2.75 million
• D) $875,000
• E) None of the above.

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Definitions:

Stock Price

The cost of purchasing a share of a company's stock, representing the market's value of a share of the company's equity.

Days Sales Outstanding

A measure of how long it takes a company to collect payment after a sale has been made, indicating the efficiency of the company's credit and collection policies.

Sales

The activities involved in selling products or services, or the total amount of goods or services sold.

Times-Interest-Earned Ratio

A fiscal indicator that evaluates a firm's capacity to satisfy its debt commitments utilizing its present income.