Reference no: EM133112123

Question - A real estate developer must decide on a plan for developing a certain piece of property. After careful consideration, the developer has two acceptable alternatives: residential proposal or commercial proposal. The main factor or state of nature that will influence the profitability of the development is whether or not a shopping center is built close by and the size of the shopping center. There is a 20% chance of no center being built, a 50% chance of a medium shopping center built, and a 30% chance of a large shopping center.

If the developer selects the residential proposal and no center is built, he has a further set of options: do nothing $400,000 payoff; build a small shopping center himself $700,000 payoff; or put in a park resulting in $800,000 payoff. Should a medium shopping center be built nearby, his payoff for residential would be $1,600,000 and large shopping center results in a $1,200,000 payoff.

If the developer selects the commercial proposal and no center is built, he also has the set of options: do nothing but payoff would be $-50,000; build a small shopping center himself for $1,400,000 payoff; or put in a park resulting in $1,000,000 payoff. Should a medium shopping center be built nearby, his payoff for commercial would be $400,000 and large shopping center results in a $1,500,000 payoff.

Required -

1. Draw a decision tree for this problem.

2. Determine the EMV for the problem and identify the best decision.