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Case 2: The Iconic Feed Company, an organic food producer in New York State, is planning to purchase a piece of land with good soil

Case 2: The Iconic Feed Company, an organic food producer in New York State, is planning to purchase a piece of land with good soil for agriculture. It is now May 1, and the current price is $2.2 million. Since the company is newly established and requires a bunch of permits before starting agriculture, it does not need the land immediately. The permit process might take until the beginning of July, but their financial advisor fears another company might buy the land between now and the beginning of July. They assessed that the chance that a competitor would buy the land during May is 5%. If this does not occur, they estimate a 10% chance a competitor will buy the land during June. If Iconic Feed does not buy the land now, it can buy it at the beginning of June or July if it is still available.

The financial advisor of the company thinks the price of the land might drop significantly in one or both of the next two months (May & June), according to Table 1: Table 1 shows the probabilities of the possible price decreases during May.

The following table, Table 2, lists the conditional probabilities of the possible price decrease in June, given the price decrease in May. For example, it indicates that if the price decrease in May is $60,000, the possible price decreases in June are $0, $30,000, and $60,000 with respective probabilities 0.6, 0.2, and 0.2.

If Iconic Feed purchases the land, it believes it can gross $3 million (This does not count the cost of buying the land.) But if it does not purchase the land, Iconic Feed believes it can make $650,000 from alternative investments.Build a decision tree that helps this company decide about the best actions. You also need to answer the following questions here:

  1. How many decision nodes does your decision tree have?
  2. How many probability nodes does your decision tree have?
  3. What is the Final EMV of your decision tree?
  4. What is your optimal decision?
Table 1 - Distribution of price decrease in May
Price Decrease Probability
$0 0.5
$60,000 0.3
$120,000 0.2
Table 2 - Distribution of price decrease in June
Price decrease in May
$0 $60,000 $120,000
June decrease Probability June decrease Probability June decrease Probability
$0 0.3 $0 0.6 $0 0.7
$60,000 0.6 $30,000 0.2 $20,000 0.2
$120,000 0.1 $60,000 0.2 $40,000 0.1

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