Answer Happy

The Managing Director (MD) of a local building contractor, The Best Built Company Ltd., has been facing difficulty of maintaining its market shares as a result of the current economic downturn and fierce competitions. The MD is considering plans to improve the business. Given the Government's positive policy towards Building Information Modelling (BIM), and the benefits that will be brought about by using BIM, the MD wants to invest a capital of HK$10M in BIM development and applications. He knows that the chance of regaining the market share representing a value of HK$4M is only 70% as many of its competitors have been doing the same which means there is a 30% of possibility the investment does not work out as expected, and the company will lose half of the invested capital. Alternatively, he can take another plan as he has been invited by an experienced stated-owned property developer to invest in a residential project in the Greater Bay Area with the same amount of capital, in anticipation of a large inflow of workforce to the Area. The company is new to the mainland's market. The MD had a thorough analysis of the investment and believes that there are three likely possibilities. If the market continues to boom, it will have a capital gain of HK$8M. Unfortunately, if the housing market bursts, the company will lose HK$8M. It is also possible that the market becomes sluggish and the company will lose HK$5M as the properties can only be sold at a lower rate. According to the historical records of the mainland property market, the probabilities of experiencing a booming market, bursting of housing bubble and a sluggish market in the coming five years are 0.2, 0.4 and 0.4 respectively. Finally, if he can choose to do nothing, owing to the worsening situation, it is expected that his business will risk losing HK$3M. (a) Draw a decision tree diagram to illustrate all the possible outcomes. (14 marks) (b) Advise the MD of the best strategy that he should adopt. (13 marks) (c) Explain why the MD should not solely rely on the results of the decision tree analysis to make his decision. (6 marks)