Roney Construction Company is considering purchasing a home in the historic district of Lexington, Massachusetts, for restoration. The cost of the home is $150,000, and Roney believes that, after restoration, the home can be sold for $290,000. Roney will pay $2000 per month in finance charges until the project is completed.
The company’s architect has developed two sets of plans for the restoration. Plan A does not require changes to the front facade. Under this plan, the renovation will cost $120,000 and take three months to complete. Plan B does involve changes in the front facade of the building. Under this plan, Roney believes that it can do the restoration work in four months, at a cost of $80,000.
Because Plan B changes the exterior of the house, it must be approved by the town’s Historic Commission. The approval process takes two months and will cost $10,000. If Roney decides on Plan B, it can play it safe and wait to begin construction until after the plan has been approved by the Historic Commission. Alternatively, it can take a chance and begin construction immediately in the hopes that the commission will approve the plan.
If the Historic Commission denies Plan B, Roney will have to resort to Plan A for the renovation work. If Roney begins construction under Plan B and the Historic Commission denies the plan, the company estimates that doing the construction work under Plan A will cost $140,000 and the project will take five additional months to complete.
Roney estimates that there is a 40% chance that the Historic Commission will approve Plan B. However, if the firm were to contribute $6000 to the mayor’s reelection campaign, Roney believes the chances for approval would increase to 50%. Determine an optimal strategy for the Roney Construction Company.