Property Purchase Strategy

$($Adapted from the case $$Property Purchase Strategy$$ in ASW Book$1)$

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$ million. Based on his

experience, Glenn estimates that a bid of $$5$ million will have a $0\mathrm{.}2$ probability of being

the highest bid and securing the property for Oceanview. The current date is June $1.$

Sealed bids for the property must be submitted by August $15.$ The winning bid will be

announced on September $1.$

If Oceanview 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. 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.

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 $6$ months, the deposit will be forfeited. In this case, the county will offer

the property to the next highest bidder.

To determine whether Oceanview should submit the $$5$ million bid, Glenn has done

some preliminary analysis. This preliminary work provided an assessment of $0\mathrm{.}3$ for the

probability that the referendum for a zoning change will be approved and resulted in the

following estimates of the costs and revenues that will be incurred if the condominiums

are built.

Cost and Revenue Estimates

Revenue from condominium sales $$15,000,000$

Cost

Property $$5,000,000$

Construction expenses $$6,000,000$

If Oceanview obtains the property and the zoning change is rejected in November,

Glenn believes that the best option would be for the firm not to complete the purchase of

the property. In this case, Oceanview would forfeit the $10\%$ deposit that accompanied

the bid.

$1$ An Introduction to Management Science: Quantitative Approaches to Decision Making, by D$.$ Anderson, D$.$

Sweeney, and T$.$ Williams, $11$th edition, Case Problem $1,$ pp$703-704$

Because the likelihood that the zoning referendum will be approved is such an important

factor in the decision process, Glenn has 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 zoning change would be approved. The results of the

study will be available August $1,$ so that Oceanview 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 or a prediction that the zoning change will be rejected.

Oceanview Development has worked with three market research firms in the past. All of

them can conduct the study, but their fees and research quality are different. After

considering the record of the market research firms in previous studies conducted for

Oceanview, Glenn has developed the following probability estimates concerning the

accuracy of their market research information:

Market Research Information Accuracy Fees

Prob$($A$|$A$)$ Prob$($N$|$A$)$ Prob$($A$|$N$)$ Prob$($N$|$N$)$

Firm $10\mathrm{.}90\mathrm{.}10\mathrm{.}20\mathrm{.}8$ $$15,000$

Firm $20\mathrm{.}80\mathrm{.}20\mathrm{.}10\mathrm{.}9$ $$14,000$

Firm $30\mathrm{.}90\mathrm{.}10\mathrm{.}10\mathrm{.}9$ $$17,000$

where

$$A$=$ prediction of zoning change approval

$$N$=$ prediction that zoning change will not be approved

A $=$ zoning change will be approved

N $=$ zoning change will be rejected

Questions:

$1.$ If Glenn cannot hire more than one market research firm, should he hire any of

the three firms? If so$,$ which one should he hire? What is Glenn$$s overall optimal

decision?

$2.$ Now consider the possibility of hiring two market research firms at the same time.

If two firms are hired, then two surveys of voters will be conducted independently

and simultaneously by the two firms. Should Glenn hire two firms? If so$,$ which

two firms should he hire? What is Glenn$$s overall optimal decision? $($Hint: Glenn

should hire two firms at the same time if and only if doing so leads to a higher

expected benefit than hiring only one firm or none.$)$