Property Purchase Strategy (from the textbook, data altered)
Gordon Frantini, president of Lakeshore Development Corporation,
is considering submitting a bid to purchase property that will be sold
by sealed bid at a city tax foreclosure. Gordon’s initial judgment is
to submit a bid of $6 million. Based on his experience, Gordon
estimates that a bid of $6 million will have a 0.22 probability of being the highest bid and securing the
property for Lakeshore. The current date is September 1, 2016. Sealed bids for the property must be
submitted by November 15, 2016. The winning bid will be announced on December 1, 2016.
If Lakeshore Corporation 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. Gordon Frantini believes that a referendum could be
placed on the voting ballot in time for the February 2017 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 city will offer the property to the next highest bidder.
To determine whether Lakeshore should submit the $6 million bid, Gordon conducted some
preliminary analysis. This preliminary work provided an assessment of 0.35 for the probability that the
referendum for a zoning change will be approved and resulted in the following estimates of the cost
and revenues that will be incurred if the condominiums are built:
Cost and Revenue Estimates
Revenue from condominium sales $17,000,000
Construction expenses $8,500,000
If Lakeshore Corporation obtains the property and the zoning change is rejected in February 2017,
Gordon believes that the best option would be for the firm not to complete the purchase of the
property. In this case, Lakeshore would forfeit the 10% deposit that accompanied the bid.
Because the likelihood that the zoning referendum will be approved is such an important factor in
the decision process, Gordon suggested that the firm hire a market research service to conduct a survey
Assignment 1 STAT 2112 Fall 2016 by Prof. A.Gokhman 2
of voters. The survey would provide a better estimate of the likelihood that the referendum for a
zoning change would be approved. The market research firm that Lakeshore Development has worked
with in the past has agreed to do the study for $20,000. The results of the study will be available
November 1, 2016, so that Lakeshore will have this information before the November 15, 2016 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 Lakeshore Corporation, Gordon developed the
following probability estimates concerning the accuracy of the market research information:
prediction of zoning change approval 0.95 the zoning change is approved by the voters
prediction of that zoning change will not be approved 0.05 the zoning change is approved by the voters
f zoning change approval 0.15 the zoning change is rejected by the voters
prediction of that zoning change will not be approved 0.85 the zoning change is rejected by the voters
Please help Gordon Frantini to perform an analysis of the problem facing the Lakeshore Development
Corporation, and prepare a report that summarizes your findings and recommendations. Include the
following items in your report:
1. A (simple) decision tree that shows the logical sequence of the decision problem given the
market research information is not available.
2. A recommendation regarding what Lakeshore Development Corporation should do if the
market research information is not available.
3. A decision strategy that Lakeshore Development Corporation should follow if the market
research is conducted based on the posterior probabilities and a revised decision tree.
4. A recommendation as to whether Lakeshore Development Corporation should employ the
market research firm, along with the value of the information provided by the market research
firm and the efficiency of this information.
Use Excel TreePlan to construct both decision trees. Include the details of your analysis as well as
the TreePlan output as an appendix to your report.
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