Belt Auction

Decision Tree Analysis?

Bulloch County has never allowed alcohol to be sold in restaurants. However, in three months, county residents are scheduled to vote on a referendum t o allow liquor to be sold by the drink. Currently, polls indicate that there is a 60% chance that the referendum will be passed by voters. Phil Jackson is a local real estate speculator who is eying a closed restaurant building that is scheduled to be sold at a sealed bid auction. Phil estimates that if he bids $1.25 million, there is a 25% chance he will obtain the property; if he bids $1.45 million, there is a 45% chance he will obtain the property; and if he bids $1.85 million, there is an 85% chance he will obtain the property. If he acquires the property and the referendum passes, Phil believes he could then sell the restaurant for $2.2 million. However, if the referendum fails, he believes he could sell the property for only $1.15 million. I need to set up a decision tree for this and calculate the EMV. However I don't know how to set up the tree or probabilities to really use in the equation...any help with this would be great. I'm so confused as to where to start

Public Comments

1. This is from an excel sheet. You should be able to figure out where it goes. BidChance of winning Bid*chance Return Prob of returnReturn * ProbPotential profit/Loss 1,250,000.00 25% 312,500.00 2,200,000.00 60% 1,320,000.00 1,007,500.00 1,150,000.00 40% 460,000.00 147,500.00 1,450,000.00 45% 652,500.00 2,200,000.00 60% 1,320,000.00 667,500.00 1,150,000.00 40% 460,000.00 (192,500.00) 1,850,000.00 85% 1,572,500.00 2,200,000.00 60% 1,320,000.00 (252,500.00) 1,150,000.00 40% 460,000.00 (1,112,500.00)