Glenn Foreman, president of Ocean view Development Corporation, is consideringsubmitting 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, Glennestimates that a bid of $5 million will have a 0.2 probability of being the highest bid andsecuring the property for Oceanview. The current date is June 1. Sealed bids for the propertymust 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 andsell a complex of luxury condominiums. However,a complicatingfactor is that the propertyis currently zoned for single-family residences only. Glenn believes that a referendum couldbe placed on the voting ballot in time for the November election. Passage of the referendumwould 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, thedeposit is the down payment for the property. However, if the bid is accepted and the bidderdoes not follow through with the purchase and meet the remainder of the financial obligationwithin six months, the deposit will be forfeited. In this case, the county will offer theproperty to the next highest bidder.
To determine whether Oceanview should submit the $5 million bid, Glenn conductedsome preliminary analysis. This preliminary work provided an assessment of 0.3 forthe probability that the referendum for a zoning change will be approved and resulted inthe following estimates of the costs and revenues that will be incurred if the condominiumsare built.
REVENUE AND COST EXTIMATES
REVENUE FROM CONDOMINIUM SALES
$ 15 MILLION
$ 5 MILLION.
$ 8 MILLION.
If Oceanview obtains the property and the zoning change is rejected in November, Glennbelieves that the best option would be for the firm not to complete the purchase of the property.In this case, Ocean view would forfeit the 10% deposit that accompanied the bid.Because the likelihood that the zoning referendum will be approved is such an importantfactor in the decision process, Glenn has suggested that the firm hire a market research
service to conduct a s urvey of voters. The survey would provide a better estimate of thelikelihood that the referendum for a zoning change would be approved. The market researchfirm that Oceanview Development has worked with in the past has agreed to do the studyfor $15,000.The results of the study will be available August 1, so that Oceanview will havethis information before the August 15 bid deadline. The results of the survey will be eithera 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 previousstudies conducted for Oceanview, Glenn has developed the following probability estimatesconcerning the accuracy of the market research information.
P(A |s1) = 0.9
P(A |s2) = 0.2
p(N | s1) = 0.1
P(N |s2) = 0.8
A = prediction of zoning change approval
N = prediction that zoning change will not be approved
s1 = the zoning change is approved by the voters
s2 = the zoning change is rejected by the voters
Perform an analysis of the problem facing the Oceanview Development Corporation, andprepare a report that summarizes your findings and recommendations. Include the followingitems 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 isnot available
3A decision strategy that Oceanview should follow if the market research is conducted
4. A recommendation as to whether Oceanview should employ the market researchfirm, along with the value of the information provided by the market research firmInclude the details of your analysis as an appendix to your report.