Steeley Associates, Inc., a property development firm, purchased an old house near the town square in Concord Falls, where State University is located. The old house was built in the mid-1800s, and Steeley Associates restored it. For almost a decade, Steeley 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 Steeley 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 Steeley and hinted that if Steeley requested a permit, the town would probably reject it. Steeley 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.
If Steeley 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, Steeley 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 Steeley 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 Steeley Associates's decision situation, using expected value, and indicate the appropriate decision with these criteria.
B. Indicate the decision you would make and explain your reasons.