The CEO of a company is considering submitting a bid to purchase property that will be sold by sealed bid. His initial judgment is to submit a bid of $5 million. Based on his experience, he estimates that a bid of $5 million will have a 0.2 of being the highest bid and securing the property for the company. The current date is June 1. Sealed bids must be submitted by August 15. The winning bid will be announced on September 1. If the company submits the highest bid and obtain the property, it 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. The CEO believes that a referendum could be placed on the voting ballot in time for the November elections. Passage of the referendum would change the zoning property and permit construction of luxury 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 county will offer the property to the next highest bidder. To determine whether the company should submit the $5 million bid, the CEO conducted some preliminary analysis. This preliminary work provided an assessment of 0.3 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 $8,000,000 If the company obtains the property and the zoning change is rejected in November, the CEO believes that the best option would be for the firm not to complete the purchase of the property. In this case, the company 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, the CEO 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 market research firm that the company has worked with in the past has agreed to do the study for $15,000. The results of the study will be available August 1, so that the company 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. After considering the record of the market research service in previous studies conducted for the company, the CEO developed the following probability estimates concerning the accuracy of the market research information: P(PA|A) = 0.9 and P(PA|N) = 0.2, where PA= prediction of zoning change approval PN = prediction that zoning change will not be approved A = the zoning change is approved by the voters N = the zoning change is rejected by the voters Perform an analysis of the problem facing the CEO of the company and report your findings and recommendations by answering the following questions 1. A decision tree that shows the logical sequence of the decision problem 2. A recommendation regarding what the company should do it the market research information is not available 3. A decision strategy that the company should follow if the market research was conducted 4. A recommendation as to whether the company should employ the market research firm, along with the value of the information provided by the market research firm.
The CEO of a company is considering submitting a bid to purchase property that will be sold by sealed bid. His initial judgment is to submit a bid of $5 million. Based on his experience, he estimates that a bid of $5 million will have a 0.2 of being the highest bid and securing the property for the company. The current date is June 1. Sealed bids must be submitted by August 15. The winning bid will be announced on September 1. If the company submits the highest bid and obtain the property, it 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. The CEO believes that a referendum could be placed on the voting ballot in time for the November elections. Passage of the referendum would change the zoning property and permit construction of luxury 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 county will offer the property to the next highest bidder. To determine whether the company should submit the $5 million bid, the CEO conducted some preliminary analysis. This preliminary work provided an assessment of 0.3 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 $8,000,000
If the company obtains the property and the zoning change is rejected in November, the CEO believes that the best option would be for the firm not to complete the purchase of the property. In this case, the company 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, the CEO suggested that the firm hire a
Perform an analysis of the problem facing the CEO of the company and report your findings and recommendations by answering the following questions
1. A decision tree that shows the logical sequence of the decision problem
2. A recommendation regarding what the company should do it the market research information is not available
3. A decision strategy that the company should follow if the market research was conducted
4. A recommendation as to whether the company should employ the market research firm, along with the value of the information provided by the market research firm.
Trending now
This is a popular solution!
Step by step
Solved in 8 steps with 7 images
