Question

A real-estate investor has the opportunity to purchase a small apartment complex.  The apartment complex costs $4 million and is expected to generate net revenue (net after all operating and finance costs) of $60,000 per month.  Of course, the revenue could vary because the occupancy rate is uncertain.  Considering the uncertainty, the revenue could vary from a low of -$10,000 to a high of $100,000 per month.  Assume that the investor’s objective is to maximize the value of the investment at the end of 10 years.

A) Do you think the investor should buy the apartment complex or invest the $4 million in a 10-year certificate of deposit earning 9.5%?  Why?

B) The city council is currently considering an application to rezone a nearby empty parcel of land.  The owner of that land wants to build a small electronics-assembly plant.  The proposed plant does not really conflict with the city’s overall land use plan, but it may have a substantial long-term negative effect on the value of the nearby residential district in which the apartment complex is located.  Because the city council currently is divided on the issue and will not make a decision until next month, the real estate investor is thinking about waiting until the city council makes its decision.  If the investor waits, what could happen?  What are the trade-offs that the investor has to make in deciding whether to wait or to purchase the complex now?

C) Suppose the investor could pay the seller $10,000 in earnest money now, specifying in the purchase agreement that if the council’s decision is to approve the rezoning, the investor can forfeit the $10,000 and forego the purchase.  Draw and solve a decision tree showing the investor’s three options.  Examine the alternatives for dominance.  If you were the investor, which alternative would you choose?  Why?

I just need the decision tree in part C

Answer 1

Tu ves to cau of OP POYHumay c) If earnest novel of $10000 is paid then investova hedge worself against the possible loss of oppor In case the rezoning is not done and he intend invest in apfald rents and cloo against the probas loss of eroding his investment if invests now realises later that re zoning will be done and a indact on app altrent Set to loss due to its negative against the probable invests now and valve. Possible the decision tree could be : Please refer irage. 3 possibilities Invest in certificate of deposit . pay earnest roney Dont Pay eainet honey and wait for decision on veroning to wait for dea on rezoning Croin . As calculated iu pard (A) of the Risk shall be as pel auswer calculation in Patt(B ) of Safeguard the option of Investing in case retoning is nod dove availability to for teed money back in case rezonug is done Ом) дел In the investor as risk aveause, then he can staightawan go for the option of investing in the centicate Of deposit let investor il rux aggressive and dond want to this opportunity of investing anno portunity of investing in appartements goin e rezoning is not done, then he may go for option and third pay the earnest the