The Architecture Company
An architecture company was invited to submit, until the end of February, two proposals regarding two new university buildings. The preparation of a proposal for the first building involves a cost of forty (40) thousand Euros. Preparing a proposal for the second building costs twenty (20) thousand Euros. If the proposal for the first building is accepted, the company will earn one hundred and twenty (120) thousand Euros. If the proposal for the second building is accepted the earnings will be seventy (70) thousand Euros. The final profit is given by the total earnings (resulting from the accepted proposals) minus the total costs of preparation of the proposals.
The architecture company has the option to submit no proposal, to submit a proposal for only one of the buildings, or to submit proposals for the two buildings. Any of the submitted proposals may be accepted or rejected. If two proposals are submitted, it is possible that none is accepted, only one is accepted, or both are accepted. In the particular case that both proposals are submitted and both are accepted then there will be severe problems implementing both projects simultaneously implying an extra cost of fifty (50) thousand Euros (to be deducted from profits). There is a 50% probability that a proposal for the first building is accepted. The probability that a proposal for the second building is accepted is 50%. The acceptance of one proposal is independent of the acceptance of the other proposal. Answer the following questions by presenting your calculations and justifying your answers.
(a) If the maximum EMV decision criterion is adopted, should any proposals be submitted? If yes, for only one building (which one?) or for both? What is the EMV for the optimal decision?
(b) If the architecture company was risk averse, could the optimal decision be different