Question

6 – ​​​​​​​​​​

Strata Investors buys real estate, develops it, and resells it for a profit. A new property is available, and Bud Strasta, the president and owner of Strasta Investors, believes if he purchases and develops this property it can then be sold for $160,000. The current property owner has asked for bids and stated that the property will be sold for the highest bid in excess of $100,000. Two competitors will be submitting bids for the property. Strasta 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 $100,000 and $150,000.

a) Develop a worksheet that can be used to simulate the bids made by the two competitors. Strasta is considering a bid of $130,000 for the property. Using a simulation of 1000 trials, what is the estimate of the probability Strasta will be able to obtain the property using a bid of $130,000?

b) How much does Strasta need to bid to be assured of obtaining the property? What is the profit associated with this bid?

c) Use the simulation model to compute the profit for each trial of the simulation run. With maximization of profit as Strasta’s objective, use simulation to evaluate Strasta’s bid alternatives of $130,000, $140,000, or $150,000. What is the recommended bid, and what is the expected profit?

Answer 1

ANSWER

The simulation model

All the formulas used in the simulation are clearly specified below to simplify it:

Cell	Formula	Copy to
B11	=100000+RAND()*(150000-100000)	B11:C1010
D11	=MAX(B11:C11)	D11:D1010
E11	=IF(D11<$C$3,1,0)	E11:E1010
F11	=(160000-$C$3)*E11	F11:F1010
C5	=AVERAGE(E11:E1010)
C7	=AVERAGE(F11:F1010)

a) Probability = 36.3 %

b) Strassel need to bid to ensure winning = $ 150,000 (the maximum possible bid by the other two competitors)

Profit associated with this bid = 160,000 - 150,000 = $ 10,000

c) Using trial and error, change the Strassel bid value (in cell C3) and note down the expected profit associated with each bid amount.

With bid amount of $ 130,000, expected profit = $ 11,400

With bid amount of $ 140,000, expected profit = $ 12,580

With bid amount of $ 150,000, expected profit = $ 10,000

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