4. A company wanting to build a hotel in downtown St. John's needs to buy two ad-jacent properties. The appraised values for Properties 1 and 2 are $1,000,000, and$2,600,000 respectively. They can try to buy these properties (by making separateoffers to the two owners) for 50% more than the appraised value, for which there isa 75% chance that the owner of Property 1 would agree to sell, and an 80% chancethat the owner of Property 2 would agree to sell. If an offer at 1.5 times appraisedvalue is turned down, they could then offer double the appraised value for that prop-erty, for which it is certain that the owner (of either property) would agree to sell.Ending up with no properties is worth nothing; ending up with just one propertyis worth only the appraised value of that one property; ending up owning both isworth $6,000,000.(a) Given that at the outset any offer to buy would be made to both owners simulta-neously, draw a decision tree to determine what the hotel developer should do.(Hint: You might find it easier to imbed all costs at the end.)(b) Determine the EVPI by any method.

(a) Given that at the outset any offer to buy would be made to both owners simulta- neously, draw a decision tree to determine what the hotel developer should do. (Hint: You might find it easier to imbed all costs at the end.) (b) Determine the EVPI by any method.

(a) Given that at the outset any offer to buy would be made to both owners simulta- neously, draw a decision tree to determine what the hotel developer should do. (Hint: You might find it easier to imbed all costs at the end.) (b) Determine the EVPI by any method.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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4. A company wanting to build a hotel in downtown St. John's needs to buy two ad-
jacent properties. The appraised values for Properties 1 and 2 are $1,000,000, and
$2,600,000 respectively. They can try to buy these properties (by making separate
offers to the two owners) for 50% more than the appraised value, for which there is
a 75% chance that the owner of Property 1 would agree to sell, and an 80% chance
that the owner of Property 2 would agree to sell. If an offer at 1.5 times appraised
value is turned down, they could then offer double the appraised value for that prop-
erty, for which it is certain that the owner (of either property) would agree to sell.
Ending up with no properties is worth nothing; ending up with just one property
is worth only the appraised value of that one property; ending up owning both is
worth $6,000,000.
(a) Given that at the outset any offer to buy would be made to both owners simulta-
neously, draw a decision tree to determine what the hotel developer should do.
(Hint: You might find it easier to imbed all costs at the end.)
(b) Determine the EVPI by any method.

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