In: Statistics and Probability
Glenn Foreman, president of Oceanview Development Corporation,
is considering submit- ting a bid to purchase property that will be
sold by sealed bid at a county tax foreclosure. Glenn’s initial
judgment is to submit a bid of $5 million. Based on his experience,
Glenn estimates that a bid of $5 million will have a 0.2
probability of being the highest bid and securing the property for
Oceanview. The current date is June 1. Sealed bids for the prop-
erty must be submitted by August 15. The winning bid will be
announced on September 1.
If Oceanview submits the highest bid and obtains the property, the
firm plans to build and sell a complex of luxury condominiums.
However, a complicating factor is that the property is currently
zoned for single-family residences only. Glenn believes that a ref-
erendum could be placed on the voting ballot in time for the
November election. Passage of the referendum would change the
zoning of the property and permit construction of the
condominiums.
The sealed-bid procedure requires the bid to be submitted with a
certified check for 10% of the amount bid. If the bid is rejected,
the deposit is refunded. If the bid is accepted, the deposit is the
down payment for the property. However, if the bid is accepted and
the bidder does not follow through with the purchase and meet the
remainder of the financial obligation within six months, the
deposit will be forfeited. In this case, the county will offer the
property to the next highest bidder.
To determine whether Oceanview should submit the $5 million bid,
Glenn conducted some preliminary analysis. This preliminary work
provided an assessment of 0.3 for the prob- ability that the
referendum for a zoning change will be approved and resulted in the
following estimates of the costs and revenues that will be incurred
if the condominiums are built:
If Oceanview obtains the property and the zoning change is rejected
in November, Glenn believes that the best option would be for the
firm not to complete the purchase of the property. In this case,
Oceanview would forfeit the 10% deposit that accompanied the
bid.
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Cost and revenue Estimates
Revenue from condominium sales
Cost Property Construction expenses
$15,000,000
$5,000,000
$8,000,000
Because the likelihood that the zoning referendum will be
approved is such an impor- tant factor in the decision process,
Glenn suggested that the firm hire a market research service to
conduct a survey of voters. The survey would provide a better
estimate of the likelihood that the referendum for a zoning change
would be approved. The market re- search firm that Oceanview
Development has worked with in the past has agreed to do the study
for $15,000. The results of the study will be available August 1,
so that Oceanview will have this information before the August 15
bid deadline. The results of the survey will be either a prediction
that the zoning change will be approved or a prediction that the
zoning change will be rejected. After considering the record of the
market research service in previous studies conducted for
Oceanview, Glenn developed the following probability estimates
concerning the accuracy of the market research information:
where
P(A Z s1) 5 0.9 P(N Z s1) 5 0.1 P(A Z s2) 5
0.2 P(N Z s2) 5 0.8
A 5 prediction of zoning change approval N 5 prediction that zoning
change will not be approved s1 5 the zoning change is approved by
the voters s2 5 the zoning change is rejected by the voters
managerial report
Perform an analysis of the problem facing the Oceanview Development
Corporation, and prepare a report that summarizes your findings and
recommendations. Include the follow- ing items in your
report:
1. A decision tree that shows the logical sequence of
the decision problem 2. A recommendation regarding what Oceanview
should do if the market research
information is not available 3. A decision strategy
that Oceanview should follow if the market research is conducted 4.
A recommendation as to whether Oceanview should employ the market
research
firm, along with the value of the information provided by the
market research firm Include the details of your analysis as an
appendix to your report.
ANSWER:
Without Market research:
Bid Rejected = 0
Bid Approved , Zoning rejected
Bid Approved , Zoning Accpeted
Bid Rejected | Bid Accepted | 0.2 | ||
0 | Zoning Accepted | 0.3 | Zoning rejected | 0.7 |
2000000 | EV: 120000 | -500000 | EV: -70000 | |
EV | 50000 |
EV | 0.05 M |
So, the Bidding should be done as EV is positive
In cae MR is hired:
So, EV = 0.27
So, the MR should be hired as then the EV is higher than without MR, i.e +0.27 vs +0.05