Decision Analysis Case Problem: Property Purchase Strategy The decision tree for the Oceanview decision problem is shown below. Note that the final outcome of whether the zoning change is approved or rejected by the voters occurs after Oceanview decides to bid and then wins the bid. Otherwise, the outcome of the vote on the zoning change does not enter into the problem 1 Market Research No Market Research Predicts Approval Predicts Rejection Bid Do Not Bid. Bid 4 Do Not Bid Bid Do Not Bid Highest Bid 6 7 Not Highest Bid Highest Bid 10 Not Highest Bid Highest Bid 11 Not Highest Bid Zoning Approved Zoning Rejected Zoning Approved Zoning Rejected Zoning Approved Zoning Rejected Payoff 1,985,000 -515,000 -15,000 -15,000 1,985,000 -$15,000 -15,000 -15,000 2,000,000 -500,000 0 0 Payoff values are the profit computed from the given revenue, property cost, construction expenses, property cost deposit and marketing research cost given in the problem. The decision tree with branch probabilities and expected values is as follows: Market Research No Market Research Predicts Approval 41 EV - 78,993 Predicts Rejection 59 Bid 3 Do Not Bid 4 Bid Do Not Bid Bid 5 Do Not Bid 6 Highest Bid 9 EV-214,250 Not Highest Bid 8 7 EV-89,600 8 Not Highest Bid Highest Bid Highest Bid 10) EV--388,000 Rejected 9492 Approved 1,985,000 6585 EV 50,000 EV 1,131,250 Rejected 3415 Not Highest Bid Approved 05 Approved 3 -515,000 11) EV-250,000 Rejected .7 -15,000 1,985,000 If the market research predicts approval of the zoning change, bid. If the market research predicts rejection of the zoning change, do not bid. -515,000 -15,000 -15,000 2,000,000 -500,000 If the market research is not conducted, Oceanview should go ahead and bid. The expected value of this action is $50,000 as shown at node 8 of the decision tree. However, the analysis shows that the recommended strategy is to conduct the market research first: the value of the market research exceeds its cost. The optimal strategy is as follows: The expected value of this strategy, including the cost of conducting the market research, is $78,993. The market research has a value of $78,993-$50,000 $28,993 over and above the cost of the research only. Decision Analysis Case Problem: Property Purchase Strategy The decision tree for the Oceanview decision problem is shown below. Note that the final outcome of whether the zoning change is approved or rejected by the voters occurs after Oceanview decides to bid and then wins the bid. Otherwise, the outcome of the vote on the zoning change does not enter into the problem 1 Market Research No Market Research Predicts Approval Predicts Rejection Bid Do Not Bid. Bid 4 Do Not Bid Bid Do Not Bid Highest Bid 6 7 Not Highest Bid Highest Bid 10 Not Highest Bid Highest Bid 11 Not Highest Bid Zoning Approved Zoning Rejected Zoning Approved Zoning Rejected Zoning Approved Zoning Rejected Payoff 1,985,000 -515,000 -15,000 -15,000 1,985,000 -$15,000 -15,000 -15,000 2,000,000 -500,000 0 0 Payoff values are the profit computed from the given revenue, property cost, construction expenses, property cost deposit and marketing research cost given in the problem. The decision tree with branch probabilities and expected values is as follows: Market Research No Market Research Predicts Approval 41 EV - 78,993 Predicts Rejection 59 Bid 3 Do Not Bid 4 Bid Do Not Bid Bid 5 Do Not Bid 6 Highest Bid 9 EV-214,250 Not Highest Bid 8 7 EV-89,600 Not Highest Bid Highest Bid 8 Highest Bid 10) EV--388,000 Rejected 9492 Approved 1,985,000 6585 EV 50,000 EV 1,131,250 Rejected 3415 Not Highest Bid Approved 05 Approved 3 -515,000 11) EV-250,000 Rejected .7 -15,000 1,985,000 If the market research predicts approval of the zoning change, bid. If the market research predicts rejection of the zoning change, do not bid. -515,000 -15,000 -15,000 2,000,000 -500,000 If the market research is not conducted, Oceanview should go ahead and bid. The expected value of this action is $50,000 as shown at node 8 of the decision tree. However, the analysis shows that the recommended strategy is to conduct the market research first: the value of the market research exceeds its cost. The optimal strategy is as follows: The expected value of this strategy, including the cost of conducting the market research, is $78,993. The market research has a value of $78,993-$50,000 $28,993 over and above the cost of the research only.