Delaware National Golf Club went out of business during the recent downturn in the economy (a sad day in the Donnelly household). Susan is a real estate developer who would like to build houses on a portion of it. To do so Susan will need the approval of the county government to change how the land is zoned. The following decision table shows the scenario’s payoffs and probabilities.

Market Alternative County Approval No County Approval Purchase land $1,500,000 -$1,600,000 Don’t purchase land $0 $0 Probability 0.30 0.70 Susan has the choice of purchasing an option to buy the land next year for $30,000. This will give her the opportunity to gain the support of the homeowners on the golf course, which will increase the likelihood of the county approving the zoning change. If the county approves the rezoning, there is a 76% probability that the homeowners will also support the change. If the county does not approve the rezoning, there is a 25% probability that the homeowners will support the change.

a. Construct a decision tree and recommend a course of action for Susan.

b. What is the most that Susan should pay to purchase the option to buy the land?

AppendixLO1