Reference no: EM13380642

The Westhouser Paper Company In the state of Washington currently has an option to purchase a piece of good timber forest land. It Is now May I. and the current price of the land is $2.2 million. Westhouser does not actually need the timber from this land until the beginning of July. but its top executives fear that another company might buy die land between now and the beginning of July. They assess that there is I chance out of 20 that a competitor will buy the land during May.lf thls does not occur. they assess that there is I chance out of 10 that the competitor will buy the land during June. If West. houscr does not take advantage of Its current op-don, it can attempt to buy the land at the beginning of June or the beginning of July. provided that it is still available.

Westhouser's incentive for delaying the purchase is that Its financial experts believe there is a good chance that the price of the land will fall significantly In one or both of the next 2 months.They assess the possible price decreases and their probabilities in Tables 10.8 and 10.9. Table 10.8 shows the probabilities of the possible price decreases during May. Table 10.9 fists the conditional probabilities of die possible price decreases In June, giren the price de-crease in May. For example, it indicates that if the price decrease In May is $60,000, then the possible price decreases in June are $0,$30,000. and $60,000 with respective probabfildes 0.6.0.2. and 0.2.

If Westhouser purchases the land. It believes that it can gross $3 million. (This does not count the cost of purchasing the land.) But if It does not purchase the land. Westhouser believes that it on make $650.000 from alternative Investments. What should the company do