Perform a decision tree analysis of lynch associates

Assignment Help Operation Management

Reference no: EM13756734

Lynch Associates, Inc., a property development firm, purchased an old house near the town square in Big Rines, where Country University is located. The old house was built in the mid-1800s, and Lynch Associates restored it. For almost a decade, Lynch has leased it to the university for academic office space. The house is located on a wide lawn and has become a town landmark.

However, in 2008, the lease with the university expired, and Lynch Associates decided to build high- density student apartments on the site, using all the open space. The community was outraged and objected to the town council. The legal counsel for the town spoke with a representative from Lynch and hinted that if Lynch requested a permit, the town would probably reject it. Lynch had reviewed the town building code and felt confident that its plan was within the guidelines, but that did not necessarily mean that it could win a lawsuit against the town to force the town to grant a permit.

The principals at Lynch Associates held a series of meetings to review their alternatives. They decided that they had three options: They could request the permit, they could sell the property, or they could request a permit for a low- density office building, which the town had indicated it would not fight. Regarding the last two options, if Lynch sells the house and property, it thinks it can get $900,000. If it builds a new office building, its return will depend on town business growth in the future. It feels that there is a 70% chance of future growth, in which case Lynch will see a return of $ 1.3 million ( over a 10- year planning horizon); if no growth ( or erosion) occurs, it will make only $200,000.

If Lynch requests a permit for the apartments, a host of good and bad outcomes are possible. The immediate good outcome is approval of its permit, which it estimates will result in a return of $ 3 million. However, Lynch gives that result only a 10% chance that it will occur. Alternatively, Lynch thinks there is a 90% chance that the town will reject its application, which will result in another set of decisions.

Lynch can sell the property at that point. However, the rejection of the permit will undoubtedly decrease the value to potential buyers, and Lynch estimates that it will get only $700,000. Alternatively, it can construct the office building and face the same potential outcomes it did earlier, namely, a 30% chance of no town growth and a $200,000 return or a 70% chance of growth with a return of $1.3 million. A third option is to sue the town. On the surface, Lynch’s case looks good, but the town building code is vague, and a sympathetic judge could throw out its suit. Whether or not it wins, Lynch estimates its possible legal fees to be $300,000, and it feels it has only a 40% chance of winning. However, if Lynch does win, it estimates that the award will be approximately $1 million, and it will also get its $3 million return for building the apartments. Lynch also estimates that there is a 10% chance that the suit could linger on in the courts for such a long time that any future return would be negated during its planning horizon, and it would incur an additional $200,000 in legal fees.

If Lynch loses the suit, it will then be faced with the same options of selling the property or constructing an office building. However, if the suit is carried this far into the future, it feels that the selling price it can ask will be somewhat dependent on the town’s growth prospects at that time, which it feels it can estimate at only 50– 50. If the town is in a growth mode that far in the future, Lynch thinks that $900,000 is a conservative estimate of the potential sale price, whereas if the town is not growing, it thinks $500,000 is a more likely estimate. Finally, if Lynch constructs the office building, it feels that the chance of town growth is 50%, in which case the return will be only $1.2 million. If no growth occurs, it conservatively estimates only a $100,000 return.

A. Perform a decision tree analysis of Lynch Associates’ decision situation, using expected value, and indicate the appropriate decision with these criteria. Build your Decision Tree using the Decision Tree tools in Risk Solver.

B. Indicate the decision you would make and explain your reasons.

Reference no: EM13756734

Questions Cloud

Risk versus reward is ongoing in each life : Risk versus reward is ongoing in each life. What does it mean and how can we assess it? Why is it important for analysts to evaluate risk versus reward thoroughly and to report on it to users and management?

Policy the administration is presently implementing : From the second e-Activity (Year of Action), select a policy the Obama administration is presently implementing. Discuss how the implementation of this policy 'cuts' across all levels of government. What level of government (who) is responsible for i..

Systems analyst participating in the systems planning phase : You are the Systems Analyst participating in the Systems Planning phase for a new CRM enterprise solution. The project manager asks you to further describe the business processes as it to the organization’s customers. Specifically, the project manage..

A gambler in las vegas is cutting a deck of cards : A gambler in Las Vegas is cutting a deck of cards for $1,000. What is the probability that the card for the gambler will be the following?

Perform a decision tree analysis of lynch associates : Lynch Associates, Inc., a property development firm, purchased an old house near the town square in Big Rines, where Country University is located. The old house was built in the mid-1800s, and Lynch Associates restored it. For almost a decade, Lynch..

What will be the expected value of the tickets : The Jefferson High School Band Booster Club has organized a raffle. The prize is a $6,000 car. Two thousand tickets to the raffle are to be sold at $1 apiece. If a person purchases four tickets, what will be the expected value of the tickets?

What are the main responsibilities of a global manager : What are the main changes in this current global market? How do you define a global manager? What are the main responsibilities of a global manager?

What is the probability that an employee is male : Determine the probability of each event in this distribution. An event refers to the combinations shown in the Employees column. For example, female and union is one event while female and nonunion is another event. Are the events in this distributio..

User Account

All Pages