CASE STUDY REPORT FORMAT

1. Cover Page

2. Introduction - Current Situation Analysis and pertinent Background

including a synopsis of the relevant information from the case analysis. Review of
related literature/studies MUST be considered.

3. Body - May include:

Problem identification
Solutions to solve the problem identified

4. Conclusion
5. References (use APA style)
 Final Examination
Computer Application for IE
CASE PROBLEM (DECISION THEORY)

The Condominium

It was a hot summer day in Los Angeles and Dave Greenhouse was trying to
make a decision before 5 P.M. Dave was in the business of buying repossessed
condominium apartments from lending institutions such as savings and loan
associations and banks. In the summer of 1989, during the recession, there were
many such repossessions. The lending institutions’ objectives were to get rid of
the property as soon as possible. Dave would buy the apartments and then sell
them, hopefully with a nice profit.

This time, the Aztec Savings and Loan Association offered him three units
(he must take all of them or nothing) at a nonnegotiable price of $720,000. It was
the last day that the offer was valid and Dave knew that he must make a fast
decision. He had already had the assets appraised. The estimated selling price
that he could get for the units is shown below:

Unit 1. $269,000
Unit 2. Twenty-five percent chance of $250,000; 50 percent chance of
$260,000; and 25 percent of $270,000.
Unit 3. Thirty percent chance of $250,000; 40 percent of $260,000; and 30
percent chance of $270,000.

There was also a selling cost of $10,000 per unit (advertising, legal, financial,
and so forth).
Dave hope to sell the units within 60 days. This was the time limit the
savings and loan association gave him to pay the $720,000. Dave estimated
there was a 70 percent chance that he could do it. Any unit that was not sold
within 60 days would be sold, for certainty, within the next 30 days. However, in
that case, there would be a financial charge for late payment of $4,400 per
apartment.

Present the situation in a decision table and advise Dave on what to

do.
 Review of Related Literature

This chapter the literature that have posture and relationship to the case study.
This gave the researcher a broader concept which aid the researcher in conceptualizing
the understanding of the case study on decision theory. The literatures and article cited
will help the researchers in the conclusion of the study.

According to Berger in Statistical decision Theory and Bayesian analysis

statistical is concerned with the making of decisions in the presence of the statistical
knowledge with sheds light on the uncertainties involved in the decision problem. In
decision theory an attempt is made to combine the sample information with other relevant
aspects of the problem in order to make the best decision. Knowing the possible
consequences can be quantified by determining the loss that would be incurred for each
possible decisions.

Conforming to Felli and Hazen, mutually the traditional and the newly suggested
sensitivity measures focus completely on the chance of decision change without attention
to conforming changes in payoff, which are often small. Therefore, these measures can
radically over state problem sensitivity. On the other hand EVPI integrates both the
probability of a decision change and the marginal benefit of such a change into a single
measure, and therefore provides a superior picture of problem sensitivity.

As stated by Zervos, Johnson and Alazemi, a recurrent theme in the

considerations of many investors are buy‐low and sell‐high investment strategies. The
authors consider an investor who aims at maximizing the expected discounted cash‐flow
that can be generated by sequentially buying and selling one share of a given asset at
fixed transaction costs.

In conclusion the decision maker should consider all possible probabilities and
consequences before making a move on the problem. At the end of the day researcher
make the decision that will profit them the most.
References

Felli, James C. and Gordon B. Hazen (1998), “Sensitivity Analysis and the Expected
Value of Perfect Information” https://journals.sagepub.com

Berger, James O. (1985) “Statistical Decision Theory and Bayesian Analysis: Second
Edition”, Springer-Verlag New York, Inc., https://books.google.com.ph

Zervos, Mihail, Johnson, Timothy C. and Fares Alazemi (2012) “BUY‐LOW AND
SELL‐HIGH INVESTMENT STRATEGIES” https://onlinelibrary.wiley.com
SOLUTIONS

Decision Alternatives;
1. Decline the offer
2. Buy the units
 Sell the units at low price
 Sell the units at moderate price
 Sell the units at a high price

State of Nature;
Dave would buy the units the following are the state of nature;

 State of Nature 1; Dave would be able to sell the units within 60 days .(0.70)
 State of Nature 2; Dave could sell the units after 60 days or within 90 days. (0.30)

Compute for the payoff for each apartment unit;

Expected Revenue from each unit

Selling Advertising, Sales (60) Finance
Price legal Days Charge Sales (90) Days
finance
Decline 0.00 0.00 0.00 0.00 0.00
Purchase
All:
Unit 1 269000.00 (10,000.00) 259,000.00 (4400.00) 254,600.00

Unit 2
25% 250,000.00 (10,000.00) 240,000.00 (4400.00) 235,600.00
50% 260,000.00 (10,000.00) 250,000.00 (4400.00) 245,600.00
25% 270,000.00 (10,000.00) 260,000.00 (4400.00) 255,600.00
 Unit 3
30% 250,000.00 (10,000.00) 240,000.00 (4,400.00) 235,600.00
40% 260,000.00 (10,000.00) 250,000.00 (4,400.00) 245,600.00
30% 270,000.00 (10,000.00) 260,000.00 (4,400.00) 255,600.00

State of Nature
Higher Chance of Selling Lower Chance of Selling
Decisions the Units Within 60 days the Units Within 90 days
(70%) (30%)
Purchase;
Unit 1: 259,000.00 254,600.00
Units 2;
25% 240,000.00 235,600.00
50% 250,000.00 245,600.00
25% 260,000.00 255,600.00
Unit 3;
30% 240,000.00 235,600.00
40% 250,000.00 245,600.00
30% 260,000.00 255,600.00

Construct a payoff table

Payoff Table
Selling the Units Within Selling the units Within
60 days (70%) 90 days (30%)
Sold Low 739,000.00 725,800.00
Sold Moderate 759,000.00 745,800.00
Sold High 779,000.00 765,800.00

 Sold Low = 259,000+240,000+240,000=739,000

 Sold Moderate=259,000+250,000+250,000=759,000
 Sold High= 259,000+260,000+260,000=779,000

Payoff Table
Selling the Units Within Selling the units Within
60 days (70%) 90 days (30%)
Sold Low 739,000.00 725,800.00
Sold Moderate 759,000.00 745,800.00
Sold High 779,000.00 765,800.00

 Dave will sell the units at high price within 60 days, he can have a profit
59,000.00(779,000-720,000).

Compute for Expected Payoff

State of Nature
Selling the Units Selling the units
Decisions Within Within Expected Payoff
60 days (70%) 90 days (30%)
Purchase
1.Sold Low 739,000.00 725,800.00 735,040
2.Sold Moderate 759,000.00 745,800.00 755,040
3.Sold High 779,000.00 765,800.00 775,040

EP1= (739,000*7)+(725,800*3)=735,040
EP2= (759,000*7)+(745,800*3)=755,040
EP3= (779,000*7)+(765,800*3)=775,040

Compute the Profit under each Alternative:

State of the Nature
Selling the Units Selling the units
Decisions Within Within Expected Payoff
60 days (70%) 90 days (30%)
Purchase;
1.Sold Low 739,000.00 725,800.00 735,040
2.Sold Moderate 759,000.00 745,800.00 755,040
3.Sold High 779,000.00 765,800.00 775,040

The Following will be the profit of Dave for each Alternative:

 EP1=735,040-720,000=15,040
 EP2=755,040-720,000=35,040
 EP3=775,040-720,000=55,040

Compute the Expected Opportunity Loss

Expected opportunity Loss (EOL) Table
State of the Nature
Selling the Units Selling the units Expected
Decisions Within Within Opportunity Loss
60 days (70%) 90 days (30%)
Purchase:
1.Sold Low 4,000.00 4,000.00 4,000.00
2.Sold Moderate 2,000.00 2,000.00 2,000.00
3.Sold High 0.00 0.00 0.00

EOL1=(4,000*7)+(4,000*3)=4,000
EOL2=(2,000*7)+(2,000*3)=2,000
EOL3=(-)+(-)-0

ADVISE TO DAVE

As seen in the decision tables, we recommend to Dave that:

 He must buy the units since he has a greater chance to sell it within 60 days and earn
profits

 Whether he sells it within 60 or 90 days, he still can earn profits.

 Selling the units in the highest possible price can maximize his profits.