COOKIEW Exercise 2 Six months ago Doug Reynolds paid $25,000 for an option to purchase a piece of land he was considering developing. Another investor has offered to purchase Doug's option for $275,000. If Doug does not accept the investor's offer, he has decided to purchase the property, clear the land and prepare the site for building. He believes that once the site is prepared he can sell the land to a home builder. However, the success of the investment depends upon the real estate market at the time he sells the property. If the real estate market is down, Doug feels that he will lose $1.5 million. If market conditions stay at their current level, he estimates that his profit will be $1 million; if market conditions are up at the time he sells, he estimates a profit of $4 million. Because of other commitments Doug does not consider it feasible to hold the land once he has developed the site or himself get into home building business; thus, the only two alternatives are to sell the option or to develop the site and sell to a builder. Suppose that the probabilities of the real estate market being down, at the current level, or up are 0.6, 0.3 and 0.1 respectively. Construct a decision tree and use it to recommend an action for Doug to take. woo

Exercise 2 pece of land he was comiderieg develioping. Another investor has the imestor offer, he has decided is purchase the property, char the prepared he can sell the tand to a home bulder. However, the suectess of the imestment depends coon the pos estate market at the time he sith the property, if the rosl estate market is down. Doug leck that he waliche $15 milion. If market condibors stay at their curtent level. he estimashe that his profe will be $1 milion, if market cenditions are uo at the limate he selis, he estimates a prolit of 54 milion. Because of ofier commimends Doug does not consider it fessiele to hold the land once he has developed the site or himself pet into home bulding buciness; thas, the only two diomofives are to sell the optisn of to develop the sits and sell so bulder. Suppose that the probablities of the real estste market being Construct a decision tree and use it to recommend an action for Dose to take