A land developer needs to decide which of two parcels of land to bid on for development. The developer assesses the chance of success on bids to be 60% for parcel A and 80% for parcel B. Development of either parcel will take two years, after which time parcel A is expected to generate a profit of $200,000, and parcel B is expected to generate a profit of $ 100,000. However, if the area in which parcel B is located can be rezoned, this parcel could generate a $300,000 profit. Costs of $ 10,000 would be incurred in preparing and presenting the case for rezoning to the review board. The developer assesses the probability of a successful appeal for rezoning at 50%. An appeal for rezoning would not be undertaken unless parcel B were successfully acquired by bid.
Required:
Construct the decision tree for the land developer's problem, and calculate the expected profits for each alternative. On which parcel should the developer place a bid? Should the developer apply for rezoning?