Question
Q: Mary Koontz has to decide what to do about an apartment building she inherited from her great aunt in Walla Walla, Oregon. She can
Q: Mary Koontz has to decide what to do about an apartment building she inherited from her great aunt in Walla Walla, Oregon. She can sell the building today (i.e., beginning of year 1), at the beginning of year 2, or at the beginning of year 3. She has decided not to keep it for more than two years.
If Mary were to sell the building today, she could get $102,000. If she keeps it, she will receive a net income of $6,000 from rent each year. Mary estimates that, during year 1, there is a 25% chance that the value of the building will increase and a 75% chance of decreasing. If the value increases in the first year, then there is a 70% chance that it will increase again in the second year. If the value decreases during the first year, however, the value will also decrease in the second year with a probability of 0.9. Moreover, the value of the building will change (either increase or decrease) by $10,000 in each of the coming two years.
As a first-cut analysis, Mary decides to ignore operating cost, discounting, taxes, and other complications. develop a decision tree and analyze it to determine what Mary should do. What is her maximum expected payoff resulting from the optimal strategy?
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