CASE STUDY #1 Property Purchase Strategy

Group 5 - Cardinal, Cedana, Centena, Cereneo, Cordova

Managerial Report
Perform an analysis of the problem facing the Oceanview Development
Corporation, and prepare a report that summarizes your findings and recommendations.
Include the following items in your report:
1. A decision tree that shows the logical sequence of the decision problem
2. A recommendation regarding what Oceanview should do if the market research
information is not available
3. A decision strategy that Oceanview should follow if the market research is
conducted
4. A recommendation as to whether Oceanview should employ the market research
firm, along with the value of the information provided by the market research firm
Include the details of your analysis as an appendix to your report.

1.) A decision tree that shows the logical sequence of the decision problem
- The decision tree for the Oceanview decision problem is shown below.
 PAYOFFS

Payoff 1 (No Market Research) Payoff 1 (With Market Research)

Total Revenue $ 15,000,000 Total Revenue $ 15,000,000

Property Cost (5,000,000) Property Cost (5,000,000)

Construction Expenses (8,000,000) Construction Expenses (8,000,000)

Profit $2,000,000 Market Research Fee (15,000)

Profit $1,985,000

Payoff 2 (No Market Research) Payoff 2 (With Market Research)

Cost of forfeiting bid ($500,000) Cost of forfeiting bid ($500,000)

(10% of $5,000,000) (10% of $5,000,000)

Market Research Fee (15,000)

Total ($515,000)

BRANCH PROBABILITIES

APPROVED

States of Prior Conditional Joint Posterior

Nature Probabilities Probabilities Probabilities Probabilities

0.3 0.9 0.27 0.6585

s1

0.7 0.2 0.14 0.3415

s2

P(A) = 0.41
 NOT APPROVED

States of Prior Conditional Joint Posterior

Nature Probabilities Probabilities Probabilities Probabilities

0.3 0.1 0.03 0.0508

s1

0.7 0.8 0.56 0.9492

s2

P(N) = 0.59

The decision tree with branch probabilities and expected values is as follows:
2. A recommendation regarding what Oceanview should do if the market research
information is not available.
- If the market research is unavailable and cannot be conducted, Oceanview
can still continue the bid because as shown in no. 1 (Decision Tree) the
expected value of bidding is $50,000 which is better than not bidding at all
with the expected value of $0

3. A decision strategy that oceanview should follow if the market research is conducted.
- If market research is conducted, it should bid if it predicts approval with an
expected value of 1, 131,250. On the other hand, do not bid if it predicts
rejection.

4. A recommendation as to whether Oceanview should employ the market research firm,

along with the value of the information provided by the market research firm Include the
details of your analysis as an appendix to your report.
- It is advised that Oceanview hire the market research company since this plan
will benefit Oceanview (favorable) and have an expected value of $78,993 -
$50,000 = $28,993.