List the options that she has and the possible outcomes

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Reference no: EM133291131

Question: An entrepreneur wishes to build an exercise facility, is trying to decide which of two parcels of land to buy. Parcel A has been offered at $110,000 and Parcel B at $82,000. They seem equally attractive, so the entrepreneur initially thinks that purchasing the cheaper one, Parcel B, is the way to go. However, in questioning the sellers about the parcels, she learns that Parcel B may have an environmental problem because wastes have been dumped on it, whereas no problems are associated with Parcel A. She finds that if the wastes on Parcel B are hazardous, the law would require your client to clean up the site and that the cost of cleanup would be $60,000. She figures that the odds of Parcel B having this problem are 30%. But before she decides which parcel to buy, she can hire an environmental testing firm to determine definitively whether she would have to clean up Parcel B. Having the environmental firm do the testing would cost her $25,000.

a. List the options that she has and the possible outcomes.

She has three choices, (1) buy parcel A, (2) buy parcel B, (3) perform the environmental test and then buy either parcel A or B.

b. If all she cares about is expected wealth (and prefers more wealth to less), would you advise her to have the testing done, or should she just buy either Parcel A or Parcel B?

Reference no: EM133291131

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