) A company wanting to build a hotel in downtown St. Johns needs to buy

two adjacent properties. The appraised values for Properties 1 and 2 are $1,000,000,

and $2,600,000 respectively. They can try to buy these properties (by making sep

arate offers to the two owners) for 50% more than the appraised value, for which

there is a 75% chance that the owner of Property 1 would agree to sell, and an 80%

chance that the owner of Property 2 would agree to sell. If an offer at 1.5 times ap

praised value is turned down, they could then offer double the appraised value for

that property, for which it is certain that the owner (of either property) would agree

to sell. Ending up with no properties is worth nothing; ending up with just one

property is worth only the appraised value of that one property; ending up owning

both is worth $6,000,000.

(a) Given that at the outset any offer to buy would be made to both owners simulta

neously, draw a decision tree to determine what the hotel developer should do.

(Hint: You might fifind it easier to imbed all costs at the end.)

(b) Determine the EVPI by any method.