Reference no: EM132242818

Case Study: Decision Analysis REAL ESTATE INVESTMENT STRATEGY? Jesse Klugman, president of Seaside Development Corporation, is considering submitting a bid to purchase property that will be sold by sealed bid at county tax foreclosure, Jesse’s initial judgment is to submit a bid of $5 million will have a 0.35 probability of being the highest bid and securing the property for Seaside. The current date is June 1. Sealed bids for the property must be August 15. The winning bid will be announced on September 1. If Seaside 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. Jesse believes that a 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 ($500K). 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 Seaside should submit the $5 million bid, Jesse conducted some preliminary analysis. This preliminary work provided an assessment of a 40% chance that the referendum for a zoning change will be approved and resulted in estimates of the costs and revenues that will be incurred if the condominiums are built. If the zoning change is approved, the estimated revenue for the condominium sales is $16 million. The estimated property cost would be $5 million dollars (but already paid the $500K deposit, so only an additional $4.5 million) and estimated construction expense would be $8 million. If Seaside obtains the property and the zoning change is rejected in November, Jesse believes that the best option would be for the firm not to complete the purchase of the property. In this case, Seaside would forfeit the 10% deposit ($500K) that accompanied the bid. Because the likelihood that the zoning referendum will be approved is such an important factor in the decision process, Jesse 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 zooming change would be approved. The market research firm that Seaside Development has worked with in the past has agreed to do the study for $50,000. The results of the study will be available August 1, so that Seaside 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 (40% likely) or a prediction that the zoning change will be rejected (60% likely). After considering the record of the market research service in previous studies conducted for Seaside, Jesse developed the following probability estimates concerning the accuracy of the market research. If the market research survey predicts that the zoning change will be approved, there is a 90% chance that it will be approved and only a 10% chance that it will not be approved. If the market research survey predicts that the zoning change will not be approved, Seaside will not submit the bid. Use this information, to advise Seaside Development Corporation on their Real Estate Strategy.

(1) Organize the available data on cost, revenue, and probability estimates in a table.