1. Framing the Decision
Our objective is to maximise Anders Forsgen’s financial return from this developmental deal while keeping into account the fact that we have other option beyond this deal.
We have two primary decisions to make viz. whether:
a)we should exercise our option to buy The White Mountain Development, and, b)If we should develop White Mountain further to aim for higher returns
The development of White Mountain is attractive because as it only involves incremental capital costs, and no loss in time in terms of selling the development.
These two decisions and the net pay off would be influenced by two key uncertainties viz. whether
a)we would get the lease or not (now in question due to the lawsuit), and, b)after development if we would be able to generate enough popularity for the resort to reap additional returns.
In case the decision on the lease is not favourable, we are better off going for our alternative safe option with a net pay off of +1.5M. A favourable lease decision lends us returns of +1.7M on average, through exercising our option of buying White Mountain Development.
The reputation of the resort will affect our payoffs in case we get a favourable result on the lease (or at least expect to), and development of the resort gives us an incremental +5.5M over simply selling it without development.
2. The emergency meeting
The best course of action, given the current options and uncertainty estimates, is to exercise the option as the average expected value is 1.7M vs. 1.5M for not exercising it. (Figure 1)
Prior to the lawsuit our expected value was 5.4M (Figure 2) whereas it is now 1.7M. Consequently the lawsuit has dropped our expected value by 3.7M. Therefore if we we’re sure that our Environmental report would secure the lease we should be willing to spend up to $3.7M for this report. 3. Sensitivity analysis
Changes in the estimated probabilities for our...