Module 3 – SLP

LINEAR REGRESSION FORECASTING AND DECISION TREES
Decision Trees

Scenario: You are a consultant who works for the Excellent
Consulting Group. You have learned about three different investment
opportunities and need to decide which one is most lucrative. Following are the
three investment options and their probabilities:

Option A: Real Estate development. This is a risky
opportunity with the possibility of a high payoff, but also with no payoff at
all. You have reviewed all of the possible data for the outcomes in the next 10
years and these are your estimates of the cash payoff and probabilities:

Required initial investment: \$0.75 million

High NPV: \$5 million, Pr = 0.5

Medium NPV: \$2 million, Pr = 0.3

Low NPV: \$0, Pr = 0.2

Option B: Retail franchise for Just Hats, a boutique-type
store selling fashion hats for men and women. This also is a risky opportunity
but less so than Option A. It has the potential for less risk of failure, but
also a lower payoff. You have reviewed all of the possible data for the
outcomes in the next 10 years and these are your estimates of the payoffs and
probabilities:

Required initial investment: \$0.55 million

High NPV: \$3 million, Pr = 0.75

Medium NPV: \$2 million, Pr = 0.15

Low NPV: \$1 million, Pr = 0.1

Option C: High Yield Municipal Bonds. This option has low
risk and is assumed to be a Certainty. So there is only one outcome with
probability of 1.0:

Required initial investment: \$0.75 million

NPV: \$1.5 million, Pr = 1.0

Assignment

Develop an analysis of these three investments, and
determine which of them you should choose. Be sure to account for cash paid for
each of the three alternatives. If you do not recall how to do this, review the
practice exercises in the Background page. Do your analysis in Excel using the

Write a report to your private investment company and
decision.

decision tree analysis to the SLP 3 Dropbox.

SLP Assignment Expectations
Analysis

Accurate and complete Excel analysis.
Written Report

Length requirements: 23 pages minimum (not including Cover
and Reference pages)
Provide a brief introduction to/background of the problem.
Written analysis that supports Excel analysis and provides
thorough discussion of assumptions, rationale, and logic used.
Complete, meaningful, and accurate recommendation(s).Module 3 – SLPLINEAR REGRESSION FORECASTING AND DECISION TREESDecision TreesScenario: You are a consultant who works for the Excellent
Consulting Group. You have learned about three different investment
opportunities and need to decide which one is most lucrative. Following are the
three investment options and their probabilities:Option A: Real Estate development. This is a risky
opportunity with the possibility of a high payoff, but also with no payoff at
all. You have reviewed all of the possible data for the outcomes in the next 10
years and these are your estimates of the cash payoff and probabilities:Required initial investment: \$0.75 millionHigh NPV: \$5 million, Pr = 0.5Medium NPV: \$2 million, Pr = 0.3Low NPV: \$0, Pr = 0.2Option B: Retail franchise for Just Hats, a boutique-type
store selling fashion hats for men and women. This also is a risky opportunity
but less so than Option A. It has the potential for less risk of failure, but
also a lower payoff. You have reviewed all of the possible data for the
outcomes in the next 10 years and these are your estimates of the payoffs and
probabilities:Required initial investment: \$0.55 millionHigh NPV: \$3 million, Pr = 0.75Medium NPV: \$2 million, Pr = 0.15Low NPV: \$1 million, Pr = 0.1Option C: High Yield Municipal Bonds. This option has low
risk and is assumed to be a Certainty. So there is only one outcome with
probability of 1.0:Required initial investment: \$0.75 millionNPV: \$1.5 million, Pr = 1.0AssignmentDevelop an analysis of these three investments, and
determine which of them you should choose. Be sure to account for cash paid for
each of the three alternatives. If you do not recall how to do this, review the
practice exercises in the Background page. Do your analysis in Excel using the