property purchase strategy

951 Words Aug 13th, 2014 4 Pages
Glenn Foreman, president of Ocean view 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 0.2 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 complicatingfactor is that the property is currently zoned
Probability of highest Bid (when it is \$5 million )= 0.2
Given Bid last date to submit is Aug 15 ;Bid announced on Sep 1
As per Glenn Analysis
Probability zoning change will approved in the referendum = 0.3
So Probability not approved =0.7
Bid Requires 10% of the amount =\$5,000,000 *0.1 = \$500,000
Total Revenue if the Bid accepted andzone changed = \$ 15,000,000 Property = \$5,000,000
Construction = \$ 8,00,000
So Profit = \$15,000,000-\$13,000,000 =\$ 2,000,000 Marketing Survey Cost = \$ 15,000 Let A is the zone changed (as perglenn analysis ) N iszone not changed
So P(A) = 0.3 ; P(N) =0.7 Given Probabilities as per MarketResearch Firm P(As1 ) = 0.9 ; P(Ns1) =0.1 P(As2) = 0.2 ; P( Ns2) =0.8
Probability of Market Research gives the report that zone has changed = 0.3*0.9 + 0.7*0.2 = 0.41
Probability of MR that zone has not changed = 0.3*0.1 + 0.7*0.8 = 0.59

If The Market researchinformation is not available then Ocen view decision

To reach construction
Cost = \$ 5,000,000 + \$ 8,000,000 =\$13,000,000
Profit = \$ 2,000,000
If the Bid not accept then profit = 0
If the Bid is accepted and zone notchanged then cost = \$50,000
Profit = -\$ 50,000
Expected (Monetary Value)