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 Purchase, d Do not purchase, d (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)? Let H=High resistance to rezoning L- Low resistance to rezoning 620 P(H) = 0.55 P(s, 1H)-0.14 P(L)-0.45 PS, 16)=0.94 0 (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: -200 P(S₂1M)=0.86 P(S₂12) - 0.06 0 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, d, purchase. If low resistance L, d₂ do not purchase. If high resistance H, d, purchase. If low resistance L, d, purchase. If high resistance H, d, do not purchase. If low resistance L, d, purchase. If high resistance H, d, do not purchase. If low resistance L, d, do not purchase. (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? The investor -Select-o purchase this option, as the payoff of the investing in it is-Select- $10,000 dollars. In general, the cost of the option can be, at most, s [ in order for its payoff to break even with its cost of investing in it.

Operations Management

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 Purchase, d Do not purchase, d (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)? Let H=High resistance to rezoning L- Low resistance to rezoning 620 P(H) = 0.55 P(s, 1H)-0.14 P(L)-0.45 PS, 16)=0.94 0 (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: -200 P(S₂1M)=0.86 P(S₂12) - 0.06 0 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, d, purchase. If low resistance L, d₂ do not purchase. If high resistance H, d, purchase. If low resistance L, d, purchase. If high resistance H, d, do not purchase. If low resistance L, d, purchase. If high resistance H, d, do not purchase. If low resistance L, d, do not purchase. (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? The investor -Select-o purchase this option, as the payoff of the investing in it is-Select- $10,000 dollars. In general, the cost of the option can be, at most, s [ in order for its payoff to break even with its cost of investing in it.

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 Purchase, d Do not purchase, d (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)? Let H=High resistance to rezoning L- Low resistance to rezoning 620 P(H) = 0.55 P(s, 1H)-0.14 P(L)-0.45 PS, 16)=0.94 0 (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: -200 P(S₂1M)=0.86 P(S₂12) - 0.06 0 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, d, purchase. If low resistance L, d₂ do not purchase. If high resistance H, d, purchase. If low resistance L, d, purchase. If high resistance H, d, do not purchase. If low resistance L, d, purchase. If high resistance H, d, do not purchase. If low resistance L, d, do not purchase. (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? The investor -Select-o purchase this option, as the payoff of the investing in it is-Select- $10,000 dollars. In general, the cost of the option can be, at most, s [ in order for its payoff to break even with its cost of investing in it.

Practical Management Science

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 32P

See similar textbooks

Related questions

Question

J 2

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
Decision Alternative
Purchase, d
Do not purchase, d₂
(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)?
$
Let
H = High resistance to rezoning
L = Low resistance to rezoning
P(H) = 0.55
P(L) = 0.45
620
P(s, 1H) = 0.14
PS, 12)-0.94
Rezoning Not Approved
5₂
0
(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:
Need Help? Read It
-200
P(S₂1H)=0.86
P(S₂12)= 0.06
0
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, d, purchase. If low resistance L, d, do not purchase.
If high resistance H, d, purchase. If low resistance L, d, purchase.
If high resistance H, d, do not purchase. If low resistance L. d, purchase.
If high resistance H, d, do not purchase. If low resistance L, d, do not purchase.
(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?
The investor -Select-o purchase this option, as the payoff of the investing in it is-Select- $10,000 dollars. In
general, the cost of the option can be, at most, s
in order for its payoff to break even with its cost of investing
in it.

Expert Solution

Step by step

Solved in 4 steps with 6 images

SEE SOLUTION Check out a sample Q&A here

Blurred answer

Similar questions

At the beginning of each week, a machine is in one of four conditions: 1 = excellent; 2 = good; 3 = average; 4 = bad. The weekly revenue earned by a machine in state 1, 2, 3, or 4 is 100, 90, 50, or 10, respectively. After observing the condition of the machine at the beginning of the week, the company has the option, for a cost of 200, of instantaneously replacing the machine with an excellent machine. The quality of the machine deteriorates over time, as shown in the file P10 41.xlsx. Four maintenance policies are under consideration: Policy 1: Never replace a machine. Policy 2: Immediately replace a bad machine. Policy 3: Immediately replace a bad or average machine. Policy 4: Immediately replace a bad, average, or good machine. Simulate each of these policies for 50 weeks (using at least 250 iterations each) to determine the policy that maximizes expected weekly profit. Assume that the machine at the beginning of week 1 is excellent.
The Tinkan Company produces one-pound cans for the Canadian salmon industry. Each year the salmon spawn during a 24-hour period and must be canned immediately. Tinkan has the following agreement with the salmon industry. The company can deliver as many cans as it chooses. Then the salmon are caught. For each can by which Tinkan falls short of the salmon industrys needs, the company pays the industry a 2 penalty. Cans cost Tinkan 1 to produce and are sold by Tinkan for 2 per can. If any cans are left over, they are returned to Tinkan and the company reimburses the industry 2 for each extra can. These extra cans are put in storage for next year. Each year a can is held in storage, a carrying cost equal to 20% of the cans production cost is incurred. It is well known that the number of salmon harvested during a year is strongly related to the number of salmon harvested the previous year. In fact, using past data, Tinkan estimates that the harvest size in year t, Ht (measured in the number of cans required), is related to the harvest size in the previous year, Ht1, by the equation Ht = Ht1et where et is normally distributed with mean 1.02 and standard deviation 0.10. Tinkan plans to use the following production strategy. For some value of x, it produces enough cans at the beginning of year t to bring its inventory up to x+Ht, where Ht is the predicted harvest size in year t. Then it delivers these cans to the salmon industry. For example, if it uses x = 100,000, the predicted harvest size is 500,000 cans, and 80,000 cans are already in inventory, then Tinkan produces and delivers 520,000 cans. Given that the harvest size for the previous year was 550,000 cans, use simulation to help Tinkan develop a production strategy that maximizes its expected profit over the next 20 years. Assume that the company begins year 1 with an initial inventory of 300,000 cans.

Recommended textbooks for you

Practical Management Science

Practical Management Science

Operations Management

ISBN:

9781337406659

Author:

WINSTON, Wayne L.

Publisher:

Cengage,

Practical Management Science

Practical Management Science

Operations Management

ISBN:

9781337406659

Author:

WINSTON, Wayne L.

Publisher:

Cengage,

SEE MORE TEXTBOOKS