Glenn Foreman, president of OceanviewDevelopment Corporation, is considering submitting a bid topurchase property that will be sold by sealed bid at a county taxforeclosure. Glenn’s initial judgment is to submit a bidof $5 million. Based on his experience, Glenn estimates that abid of $5 million will have a 0.2 probability of being the highestbid abd securing the property for Oceanview. The current dateis June 1. Sealed bids for the property must be submitted byAugust 15. The winning bid will be announced on September1.

If Oceanview submits the highest bid andobtains the property, the firm plans to build and sell a complex ofluxury condominiums. However, a complicating factor is thatthe property is currently zoned for single-family residences only,Glen believes that a referendum could be placed on the votingballot in time for the November election. Passage of thereferendum would change the zoning of the property and permitconstruction of the condominiums.

               The sealed-bid procedure requires the bid to be submitted with acertified check for 10% of the amount bid. If the bid isrejected, the deposit is refunded. If the bid is accepted thedeposit is the down payment for the property. However, if thebid is accepted and the bidder does not follow through with thepurchase and meet the remainder of the financial obligation withsix months, the deposit will be forfeited. In this case, thecounty will offer the property to the next highestbidder.

               To determine whether Oveanview should submit the $5 million bid,Glenn conducted some preliminary analysis. This preliminarywork provided an assessment of 0.3 for the probability that thereferendum for a zoning change will be approved and resulted in thefollowing estimates of the costs and revenues that will incurred ifthe condominiums are built.

                                               Cost and Revenue Estimates

Revenue from condominium salescost                                $15,000,000

Property                                                                                 5,000,000Constructionexpenses                                                               8,000,000

If Oceanview obtains the property and thezoning change is rejected in November, Glenn believes that the bestoption would be for the firm not to complete the purchase of theproperty. In this case, Oveanview would forfeit the 10%deposit that accompanied the bid.

Because the likelihood that the zoningreferendum bill be approved is such an important factor in thedecision process, Glenn suggested that the firm hire a marketresearch service to conduct a survey of voters. The surveywould provide a better estimate of the likelihood that thereferendum for a zoning change would be approved. The marketresearch firm that Oceanview Development has worked with in thepast has agreed to do the study for $15,000. The results ofthe study will be available August 1, so that Oveanview will havethis information before the August 15 bid deadline. Theresults of the survey will be either a prediction that the zoningchange will be approved or a prediction that the zoning change willbe rejected. After considering the record of the marketresearch service in previous studies conducted for Oceanview, Glenndeveloped the following probability estimates concerning theaccuracy of the market research information

P(A s₁) =0.9          P(A s₂)=0.2           P(Ns₁)=0.1  P(Ns₂)=0.8

Where A= prediction of zoning changeapproval

          N=prediction that zoning change will not beapproved

          s₁ = the zoning change is approved by thevoters

          s₂= the zoning change is rejected by thevoters

Draw a decisiontree that shows the logical sequence of the decisionproblem

1. A recommendation regarding what Oceanviewshould do if the market research information is notavailable
2. A decision strategy that Oceanview shouldfollow if the market research is conducted
3. A recommendation as to whether Oveanviewshould employ the market research firm, along with the value of theinformation provided by the market researchfirm.