A real estate investor has the opportunity to purchase land currently zoned residential. If the county board approves a

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A Real Estate Investor Has The Opportunity To Purchase Land Currently Zoned Residential If The County Board Approves A 1 (108.02 KiB) Viewed 38 times

A real estate investor has the opportunity to purchase land currently zoned residential. If the county board approves a request to rezone the property as commercial within the next year, the investor will be able to lease the land to a large discount firm that wants to open a new store on the property. However, if the zoning change is not approved, the investor will have to sell the property at a loss. Profits (in thousands of dollars) are shown in the following payoff table. State of Nature Rezoning Approved Rezoning Not Approved Decision Alternative S1 S2 Purchase, di 640 -200 Do not purchase, d2 0 0 (a) If the probability that the rezoning will be approved is 0.5, what decision is recommended? purchase do not purchase What is the expected profit (in dollars)?
(b) The investor can purchase an option to buy the land. Under the option, the investor maintains the rights to purchase the land anytime during the next three months while learning more about possible resistance to the rezoning proposal from area residents. Probabilities are as follows: Let H = High resistance to rezoning L = Low resistance to rezoning = = P(H) = 0.45 P(L) = 0.55 P(S1 | H) = 0.17 Pls1 | L) = 0.77 P(s2 | H) = 0.83 Plsz | L) = 0.23 = What is the optimal decision strategy if the investor uses the option period to learn more about the resistance from area residents before making the purchase decision? If high resistance H, d2 do not purchase. If low resistance L, d2 do not purchase. If high resistance H, dy purchase. If low resistance L, di purchase. If high resistance H, dy purchase. If low resistance L, d2 do not purchase. If high resistance H, d2 do not purchase. If low resistance L, dy purchase. 1 (c) If the option will cost the investor an additional $10,000, should the investor purchase the option? Why or why not? What is the maximum (in dollars) that the investor should be willing to pay for the option? $10,000 dollars. In general, the cost of the option can be, at The investor ---Select--- v purchase this option, as the payoff of the investing in it is |---Select--- most, $ in order for its payoff to break even with its cost of investing in it.