Determine the best decision for oceanview

Assignment Help Operation Management

Reference no: EM131734221

Glenn Foreman, president of Oceanview Development Corporation, is considering submitting 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 $5.5 million. Based on his experience, Glenn estimates that a bid of $5.5 million will have a 0.2 probability of being the highest bid and securing the property for Oceanview.

The sealed-bid procedure requires the bid to be submitted with a certified check for 8% 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.

If Oceanview’s bid is accepted and they obtain the property, the firm has to decide between building and selling a complex of luxury condominiums or building and selling a complex of single family residences. However, a complicating factor is that the property is currently zoned for single-family residences only. Glenn believes that a referendum 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. To determine whether Oceanview should submit the $5 million bid, Glenn conducted some preliminary analysis. This preliminary work provided an assessment of a 40% the probability that the referendum for a zoning change will be approved.

Cost and Revenue Estimates-

Condominiums Revenue from condominium sales: $16,000,000 with a probability of 75% or 7,000,000 with a probability of 25%

Cost: Construction expenses of $7,500,000

Cost and Revenue Estimates- Single Family Homes Revenue from home sales: $12,000,000 with a probability of 70% or 6,000,000 with a probability of 30%

Cost: Construction expenses of $6,000,000

a. Draw the decision tree for this problem.

b. Calculate the expected values and determine the best decision for Oceanview.

Reference no: EM131734221

Questions Cloud

Describe the demand curve facing a monopoly : Describe the demand curve facing a monopoly and how it differs from that facing a firm in a perfectly competitive market.

How are cap rates affected by interest rates : Starting with your answer to Question, write the investor's required return as the sum of the risk-free rate plus a risk premium to establish the approximate.

Compared to non-discriminating monopoly : Explain why profits and output will be higher for a discriminating monopoly as compared to non-discriminating monopoly

Firms outsource some clinical trial responsibilities to cros : Which tasks would you outsource and which would you choose to retain within the company

Determine the best decision for oceanview : Calculate the expected values and determine the best decision for Oceanview.

Explain scientific evidence that your plant works : Explain Scientific evidence that your plant works. Title Page including your name, date, chosen herb, and word count.

What is the most important idea in this chapter : What is the most important idea in this chapter? How would you define the term or idea or concept in your own words?

Define familiar with the assignment criteria : the assignment to become familiar with the assignment criteria and expectations for successful completion of the assignment

What role does a healthy diet play in weight management : Identify strategies to assist you in maintaining your current knowledge about diet and nutrition - What role does a healthy diet play in weight management

User Account

All Pages