6. “If It Ain’t Broke” Orthopedics is leasing a facility in Los Angeles for $20,000 per month. The partners are deciding on whether to buy a property and relocate the clinic or to continue leasing the current facility for another year and then relocate the clinic. They recently saw an advertisement for a new medical complex in Glendale at a price of $2,800,000. The current interest rate for a 20-year loan is 7 percent per annum. They believe there is a 40 percent chance that this interest rate will fall to 5 percent per annum in a year’s time. They also believe that another facility they are interested in will still be available in a year at a discounted price of $2,500,000. The partners have to decide whether to buy the new facility now or in a year. Interest payments will be made on the loan at the end of each year. a. Develop a decision tree that will aid the owners in their leasing or purchasing decision. b. Fold back the tree and find the expected value. Please provide the answer in excel with the formulas and explanation
6. “If It Ain’t Broke” Orthopedics is leasing a facility in Los Angeles for $20,000 per month. The partners are deciding on whether to buy a property and relocate the clinic or to continue leasing the current facility for another year and then relocate the clinic. They recently saw an advertisement for a new medical complex in Glendale at a price of $2,800,000. The current interest rate for a 20-year loan is 7 percent per annum. They believe there is a 40 percent chance that this interest rate will fall to 5 percent per annum in a year’s time. They also believe that another facility they are interested in will still be available in a year at a discounted price of $2,500,000. The partners have to decide whether to buy the new facility now or in a year. Interest payments will be made on the loan at the end of each year. a. Develop a decision tree that will aid the owners in their leasing or purchasing decision. b. Fold back the tree and find the expected value. Please provide the answer in excel with the formulas and explanation
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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6. “If It Ain’t Broke” Orthopedics is leasing a facility in Los Angeles for $20,000 per month. The partners are deciding on whether to buy a property and relocate the clinic or to continue leasing the current facility for another year and then relocate the clinic. They recently saw an advertisement for a new medical complex in Glendale at a price of $2,800,000. The current interest rate for a 20-year loan is 7 percent per annum. They believe there is a 40 percent chance that this interest rate will fall to 5 percent per annum in a year’s time. They also believe that another facility they are interested in will still be available in a year at a discounted price of $2,500,000. The partners have to decide whether to buy the new facility now or in a year. Interest payments will be made on the loan at the end of each year.
a. Develop a decision tree that will aid the owners in their leasing or purchasing decision.
b. Fold back the tree and find the expected value.
Please provide the answer in excel with the formulas and explanation
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