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Risk Analysis and the Value of Information

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Sue Reynolds has to decide if she should get information (at cost of $300,000) to invest in retail store. if she gets the information, there is a 0.45 probability that the information will be favorable and a 0.55 probability that the information will not be favorable.If the information is favorable, there is a 0.9 probability that the store will be a success.If the information is not favorable the probability of a successful store is only 0.2 without any information,sue estimates that the probability of a successful store will be 0.6 A successful store will give a return of $120,000. if the store is built but is not successful,Sue will see a loss of $90,000. of course, she could always decide not to build the retail store.

1) construct a decision tree.
2) what do you recommend?

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I've put the decision tree and recommendations in the attached excel file. I've also written my recommendations below as they can be tough to read in excel. If you have any concerns or comments please don't hesitate to contact me. I've used arrows to ...

Solution Summary

Use a decision tree to determine whether or not to buy information before investing in a business opportunity.

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Dell, Inc. www.dell.com

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Determine if information exists in the annual report or elsewhere that can assist in valuing the non-operating net assets, debt, and other capital claims.
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Use the same company (Dell).

Find the beta for your company use: http://finance.yahoo.com/q/ks?s=AIG
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Show your calculations in an Excel document. Be sure to label each calculation clearly.

Part 3

Combined income and cash flow statement

Download the company's annual report from its website, or the company's Form 10-K from the U.S. Securities and Exchange Commission (SEC) website [www.sec.gov].

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