Decision Tree

All land within the municipality of Springfield is zoned for either agricultural, residential or commercial use.  You have just purchased a parcel of agricultural land for $20,000 in the expectation that it will be rezoned next year.  But the rezoning is controversial, and will be decided by the full City Council rather than just the Zoning Commission. 

According to your inside sources, there’s a 30% chance the land will be rezoned for commercial use; in that event, you’ll be able to sell the land for $50,000.  But the populists on the Council are pushing for more affordable housing; if they win the vote, which your sources think has a likelihood of 50%, then the land will be rezoned for residential use, and you’ll only be able to sell it for $30,000.  Of course, the Greens may win, and the land won’t be rezoned at all.  In that event, it will still be worth what you paid for it, but no more than that.

You’ve just been approached by Mr. Hi Roller.  He’s a land speculator like yourself, but he doesn’t have your inside sources.  He thinks the land will be rezoned next year, and has offered you $30,000 cash for it, right now. 

Which alternative should you choose?  Explain your decision process in detail.

Assignment Expectations

1.    
The Case is about decision trees, not flipping real estate.

2.    
Follow standard format.  A cover page, a short discussion, references and citations are all required.

3.    
Provide a table summarizing the factual data.

4.    
Explain the computations used to obtain the numbers in the table.

5.    
Present a decision tree. (This may be hand-drawn, but it must be completely legible.)

6.    
Explain the results of your computations, and how they support your answer.

7.    
There are no guidelines concerning length.  Write what you need to write – neither more, nor less.

 

8.    
Clearly demonstrate your understanding of both the theory covered and the particulars of the Case.

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