Recreational Properties

1. Framing the Decision

Our objective is to maximise Anders Forsgen’s financial return from this developmental deal while keeping into account the fact that we have other option beyond this deal.

We have two primary decisions to make viz. whether: a) we should exercise our option to buy The White Mountain Development, and,

b) If we should develop White Mountain further to aim for higher returns

The development of White Mountain is attractive because as it only involves incremental capital costs, and no loss in time in terms of selling the development.

These two decisions and the net pay off would be influenced by two key uncertainties viz. whether

a) we would get the lease or not (now in
*…show more content…*

Attached is the detailed chart showing the interplay between these two probabilities (Figure 3). It also shows two nuanced inputs i.e.

a) That for almost all cases below 50% probability of lease being granted we are better of not exercising the option to buy the development, and,

b) That given that we have a favourable lease decision, we are better off on average developing the resort, but in the absence of a certainty on lease decision, its unclear whether we should exercise out option or not in the first place.

As our payoff estimates are changing favourability of options too close to the base case scenario, we cannot make sound recommendations at this time. A slight change in the probability of the lease being granted or our ability to develop or good reputation reverses our optimal decision.

Consequently we should have less confidence in our recommendation and attempt to gain more information or time. It is to be noted that solely getting a higher certainty on the lease decision may help us provide a clear recommendation, as this uncertainty is pivotal in our choice of decision.

Sensitivity Table

4. Extending the Option

The key reason for Dolores to consider this as a good option is that it eliminates the uncertainty of the ruling on the lease issue.

Consequently the average realizable value jumps up from 1.7M to 3.5M, a gain of

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