Question 2) Ali, a businessman from Seeb, and his family traveled to Uzungl this year to spend their time in the summer and simply fell in love with the place. Ali is a long-time investor with some major assets in the tourism industry, so he is thinking about making a purchase of a small hotel there and redecorating the entire hotel before reopening it for business. After negotiations, he learns that the final asking price is $3M for the hotel. Reconstruction is estimated to cost around another $1M. Like in any business, success is uncertain and depends on whether customers will be willing to stay in this hotel once reconstruction is complete. As a result of his consultation with several experts, he came to the conclusion that he will earn a net income of $2M each year from this business over the course of next five years with probability (w.p.) 0.40, whereas his earnings will be $1M each year w.p. 0.30 and $1.5 each year w.p. 0.30 (again over 5 years). He thinks of this investment for a 5 year term, and 5 years later, he may be able to sell the hotel for $4.5M.

Other than investing into this hotel, he has other investment alternatives as well. One particular alternative is a resort hotel in Salalah. He may invest in this hotel as a shareholder (paying $5M upfront for the shares). His share of profits each year over the course of next five years is expected to be $1.5M the first year and $2M the remaining four years w.p. 0.45, whereas there is a 35% chance of a fixed return of $1M in the next 5 years. Things may go much better with the Salalah Hotel w.p. 0.20 giving a fixed $2.5M return for 5 years. Ali believes that he can sell these shares for a price of $6M five years later.

The question is simple: which investment alternative should Ali choose? Draw a decision tree for this decision situation and find which action is the best one to choose?

Question 2) Ali, a businessman from Seeb, and his family traveled to Uzungl this year to spend their time in the summer and simply fell in love with the place. Ali is a long-time investor with some major assets in the tourism industry, so he is thinking about making a purchase of a small hotel there and redecorating the entire hotel before reopening it for business. After negotiations, he learns that the final asking price is $3M for the hotel. Reconstruction is estimated to cost around another \$IM. Like in any business, success is uncertain and depends on whether customers will be willing to stay in this hotel once reconstruction is complete. As a result of his consultation with several experts, he came to the conclusion that he will earn a net income of \$2M each year from this business over the course of next five years with probability (w.p.) 0.40 , whereas his earnings will be $1M each year w.p. 0.30 and $1.5 each year w.p. 0.30 (again over 5 years). He thinks of this investment for a 5 year term, and 5 years later, he may be able to sell the hotel for $4.5M. Other than investing into this hotel, he has other investment alternatives as well. One particular alternative is a resort hotel in Salalah. He may invest in this hotel as a shareholder (paying \$5M upfront for the shares). His share of profits each year over the course of next five years is expected to be $1.5M the first year and $2M the remaining four years w.p. 0.45 , whereas there is a 35% chance of a fixed return of $1M in the next 5 years. Things may go much better with the Salalah Hotel w.p. 0.20 giving a fixed $2.5M return for 5 years. Ali believes that he can sell these shares for a price of $6M five years later. The question is simple: which investment alternative should Ali choose? Draw a decision tree for this decision situation and find which action is the best one to choose