The Westhouser Paper Company in the state of Washington is contemplating purchasing a piece land with...

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The Westhouser Paper Company in the state of Washington is contemplating purchasing a piece land with a good timber forest on it. It is now May 1, and the current price of the land is $2,200,000. Westhouser does not need the timber from this land until the beginning of July, but management fears that another company might buy the land between now and the beginning of July. They believe that there is 1 chance in 20 that a competitor will buy the land during May. If this does not occur, they think there is a 1 chance in 10 that the competitor will buy the land during June. If Westhouser does not purchase the land now, it can attempt to buy the land at the beginning of June or the beginning of July, if it is still available. Westhouser's incentive for delaying the purchase is that it believes that the price of the land might decrease in one or both of the next two months. The possible price decreases and their probabilities are shown below. Table 1 shows the probabilities of price decreases during May. Table 2 shows the conditional probabilities of the possible price decreases in June, given the price decreases in May. For example, if the price decrease in May is $100,000, then the possible price decreases in June are $0 and $50,000 with probabilities .6 and .4. respectively. Table 1: Distribution of Price Decrease in May Price Decrease Probability .8 $0 $100,000 2 Table 2: Distribution of Price Decrease in June Price Decrease in May June Decrease $0 $100,000 $0 Probability .3 .7 $100,000 June Decrease $0 $50,000 Probability .6 .4 If Westhouser purchases the land, it believes that it can gross $3 million. (This does not count the cost of purchasing the land.) But if it does not purchase the land, it believes that it can make $650,000 from alternative investments. What should the company do? The Westhouser Paper Company in the state of Washington is contemplating purchasing a piece land with a good timber forest on it. It is now May 1, and the current price of the land is $2,200,000. Westhouser does not need the timber from this land until the beginning of July, but management fears that another company might buy the land between now and the beginning of July. They believe that there is 1 chance in 20 that a competitor will buy the land during May. If this does not occur, they think there is a 1 chance in 10 that the competitor will buy the land during June. If Westhouser does not purchase the land now, it can attempt to buy the land at the beginning of June or the beginning of July, if it is still available. Westhouser's incentive for delaying the purchase is that it believes that the price of the land might decrease in one or both of the next two months. The possible price decreases and their probabilities are shown below. Table 1 shows the probabilities of price decreases during May. Table 2 shows the conditional probabilities of the possible price decreases in June, given the price decreases in May. For example, if the price decrease in May is $100,000, then the possible price decreases in June are $0 and $50,000 with probabilities .6 and .4. respectively. Table 1: Distribution of Price Decrease in May Price Decrease Probability .8 $0 $100,000 2 Table 2: Distribution of Price Decrease in June Price Decrease in May June Decrease $0 $100,000 $0 Probability .3 .7 $100,000 June Decrease $0 $50,000 Probability .6 .4 If Westhouser purchases the land, it believes that it can gross $3 million. (This does not count the cost of purchasing the land.) But if it does not purchase the land, it believes that it can make $650,000 from alternative investments. What should the company do?

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Here are the steps to solve this problem 1 Define the possible states Purchase now for 22 millio... View the full answer