Property Purchase Strategy
...referendum is not approved or the voters do not approve the referendum, than Foreman will forfeit the $500k deposit that he placed on the land. If Foreman does not submit a bid than he will neither gain nor lose money. The maximum $500k loss stems from the fact that Foreman has six months to complete the transaction and the vote will take place only two months after the election. No Market Research Based on the tree plan, the best option for Foreman is to submit a $5 million bid for the land. The expected value for this decision is $50,000. The decision to go ahead and place a bid is based on the fact that if he does not submit a bid, or his bid is rejected, than he will not lose any money. If his bid is accepted and the referendum passes, Foreman nets $2 million and if the bid is accepted but the referendum fails, then he only loses the $500k deposit on the land. With a p=.2 chance that the bid will be accepted, and a p=.3 that the referendum passes, there is a 6% chance that he will win the bid and the referendum passes. A p=.2 chance that his bid is accepted and a p=.7 that the referendum fails leaves Foreman with a 14% chance that he have to forfeit the $500k deposit. Market Research Foreman also had the option of conducting market research for $15k. The market research provided conditional probabilities as to if voters would vote for the zoning change or not. Multiplying the prior probabilities with the conditional probabilities realized the joint probabilities. The posterior probabilities were determined through dividing each of the joint probabilities by the sum of the joint probabilities. The joint probabilities determined that there was a 41% chance that the market research would be favorable and a 59% chance that the research would be unfavorable. Based on the favorable research, the best course of action was to submit a bid for the land. The expected value of this action was $215,000. Next, based on the 20% chance that the bid would be accepted, there was a 66% (posterior probability) that the referendum would pas and a 34% chance that it would fail. These probabilities contributed to the expected value and the decision to place a bid. If the ma...