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.

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