Assignment task:
Case Problem - Decision Theory
The Condominium
It was a hot summer day in Los Angeles and Dave Greenhouse was trying to make a decision before 5 P.M. Dave was in the business of buying repossessed condominium apartments from lending institutions such as savings and loan associations and banks. In the summer of 1989, during the recession, there were many such repossessions. The lending institutions' objectives were to get rid of the property as soon as possible. Dave would buy the apartments and then sell them, hopefully with a nice profit. This time, the Aztec Savings and Loan Association offered him three units (he must take all of them or nothing) at a nonnegotiable price of $720,000. It was the last day that the offer was valid and Dave knew that he must make a fast decision. He had already had the assets appraised. The estimated selling price that he could get for the units is shown below: Unit 1. $269,000 Unit 2. Twenty-five percent chance of $250,000; 50 percent chance of $260,000; and 25 percent of $270,000. Unit 3. Thirty percent chance of $250,000; 40 percent of $260,000; and 30 percent chance of $270,000. There was also a selling cost of $10,000 per unit (advertising, legal, financial, and so forth). Dave hope to sell the units within 60 days. This was the time limit the savings and loan association gave him to pay the $720,000. Dave estimated there was a 70 percent chance that he could do it. Any unit that was not sold within 60 days would be sold, for certainty, within the next 30 days. However, in that case, there would be a financial charge for late payment of $4,400 per apartment.
Present the situation in a decision table and decision tree and advise Dave on what to do.