Question

Strassel Investors buys real estate, develops it, and resells it for a profit. A new property is available, and Bud Strassel, the president and owner of Strassel Investors, believes if he purchases and develops this property it can then be sold for $165000. The current property owner has asked for bids and stated that the property will be sold for the highest bid in excess of $100000. Two competitors will be submitting bids for the property. Strassel does not know what the competitors will bid, but he assumes for planning purposes that the amount bid by each competitor will be uniformly distributed between $100000 and $155000.

1. Develop a worksheet that can be used to simulate the bids made by the two competitors. Strassel is considering a bid of $135000 for the property. Using a simulation of 1000 trials, what is the estimate of the probability Strassel will be able to obtain the property using a bid of $135000? Round your answer to 1 decimal place. Enter your answer as a percent.
   
   %
   
2. How much does Strassel need to bid to be assured of obtaining the property?
   
   $  
   
   What is the profit associated with this bid?
   
   $  
   
3. Use the simulation model to compute the profit for each trial of the simulation run. With maximization of profit as Strassel’s objective, use simulation to evaluate Strassel’s bid alternatives of $135000, $145000, or $155000. What is the recommended bid, and what is the expected profit?
   
   A bid of $145000  results in the largest mean profit of $  .

Answer 1

The distribution of bidding process is uniform, with lowest bid of $100,000 and highest bid is $150,000.

The simulated bid by clients = Lowest bid + (Random no. x (highest bid – lowest bid))

Per trail run determine bid of client 1 and client 2, then identify highest bid value to win the property.

The simulation is as follows:

a.

The probability of outbidding the competition if bid of $135,000 is placed is 39.90%

( cell G4)

b.

To be assured to win the bid, Strassel should bid highest among the simulated value. The highest bid is $154,994.56 (cell G 2)

Expected Profit = selling price – bid cost = $165,000 - $154,994.56= $10,005.44

C.

The expected profit for the various bids is calculated as follows:

Expected profit = probability of outbidding x (selling price - bid cost)

For bid of $135,000, profit = 0.3990 x (165000 – 135000) = 11,970

For bid of $145,000, profit = 0.654 x (165000 – 145000) = 13,080

For bid of $155,000, profit = 1.00 x (165000 – 155000) = 10,000

Since expected profit of bidding at $145,000 is highest, bidding of $145,000 maximizes the profit.

A bid of $145,000 results in highest mean profit of $13,080.