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586 CHAPTER 13 DECISION ANALYSIS

If Oceanview submits the highest bid and obtains firm that Oceanview Development has worked with
the property, the firm plans to build and sell a com- in the past has agreed to do the study for E15 000.
plex of luxury apartments. However, a complicating The results of the study will be available 1 August, so
factor is that the property is currently zoned for that Oceanview will have this information before the
single-family residences only. Glenn believes that a 15 August bid deadline. The results of the survey will
referendum could be placed on the voting ballot in be either a prediction that the zoning change will be
time for the November election. Passage of the approved or a prediction that the zoning change will
referendum would change the zoning of the property be rejected. After considering the record of the mar-
and permit construction of the apartments. ket research service in previous studies conducted
The sealed-bid procedure requires the bid to be for Oceanview, Glenn developed the following prob-
submitted with 10 per cent of the amount bid. If the ability estimates concerning the accuracy of the mar-
bid is rejected, the deposit is refunded. If the bid is ket research information.
accepted, the deposit is the down payment for the
PðA j s 1 Þ¼ 0:9 PðN j s 1 Þ¼ 0:1
property. However, if the bid is accepted and the bidder
PðA j s 2 Þ¼ 0:2 PðN j s 2 Þ¼ 0:8
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 where
county will offer the property to the next highest bidder.
A ¼ prediction of zoning change approval
To determine whether Oceanview should submit
N ¼ prediction that zoning change will not be
the E5 million bid, Glenn conducted some prelimi-
approved
nary analysis. This preliminary work provided an
assessment of 0.3 for the probability that the s 1 ¼ the zoning change is approved by the
referendum for a zoning change will be approved voters
and resulted in the following estimates of the costs s 2 ¼ the zoning change is rejected by the voters
and revenues that will be incurred if the apartments
are built.
Managerial Report
Cost and Revenue Estimates Perform an analysis of the problem facing the
Oceanview Development Corporation, and prepare
Revenue from apartment sales E15 000 000 a report that summarizes your findings and recom-
Cost mendations. Include the following items in your
Property E5 000 000 report:
Construction expenses E8 000 000
1 A decision tree that shows the logical sequence
If Oceanview obtains the property and the zoning of the decision problem.
change is rejected in November, Glenn believes that 2 A recommendation regarding what Oceanview
the best option would be for the firm not to complete should do if the market research information is
the purchase of the property. In this case, Ocean- not available.
view would forfeit the 10 per cent deposit that 3 A decision strategy that Oceanview should follow
accompanied the bid. if the market research is conducted.
Because the likelihood that the zoning referen-
4 A recommendation as to whether Oceanview
dum will be approved is such an important factor in
should employ the market research firm, along
the decision process, Glenn suggested that the firm
with the value of the information provided by the
hire a market research service to conduct a survey of
market research firm.
voters. The survey would provide a better estimate of
the likelihood that the referendum for a zoning Include the details of your analysis as an appendix to
change would be approved. The market research your report.

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