Recreational Properties
Management Science – Workshop 2: Case Study Recreational Properties
1. 1. Framing the Decision 2. Recreational Properties obtained a package of options to acquire three parcels that would allow them to develop a ski resort. The company paid €500,000 for the package of options in June 2001. The options gave the company the right, but not the obligation, to acquire the three parcels at a (strike) price of €10 million in June 2002. 3. Furthermore, in order to develop the three parcels into a ski resort, the company needed leases from the European Union Environment Agency. When the company purchased the options, they expected the leasing agreement before December 2001. Unfortunately, a group of conservationists had filed a lawsuit against the EU Environment Agency. Because of this suit, the Agency Commissioner refused to consider the leasing agreement for the east side of the mountain until the outcome of the lawsuit.
4. a. Objective of Recreational Properties: The main objective of Recreational Properties is to analyse the options and outcomes with respect to the package of options realistically available to them. 5. b. Decisions to be made: c. i. Exercise the options and acquire the three parcels or not. d. ii. If the options are exercised, either sell the property without any development or develop the property at an extra cost of approximately €5 million. 6. e. Uncertainties involved in the decisions: These observations might be directly extracted from the decision tree in appendix 1. a. iii. Lawsuit outcome: The main uncertainty that Recreational Properties faces is that of the outcome of the lawsuit which translates into either getting the lease for the east side of the mountain or not. This uncertainty is estimated at 50% probability thereby reducing the expected value by €3.7 million. b. iv. Reputation: The uncertainty of the popularity of the
1. 1. Framing the Decision 2. Recreational Properties obtained a package of options to acquire three parcels that would allow them to develop a ski resort. The company paid €500,000 for the package of options in June 2001. The options gave the company the right, but not the obligation, to acquire the three parcels at a (strike) price of €10 million in June 2002. 3. Furthermore, in order to develop the three parcels into a ski resort, the company needed leases from the European Union Environment Agency. When the company purchased the options, they expected the leasing agreement before December 2001. Unfortunately, a group of conservationists had filed a lawsuit against the EU Environment Agency. Because of this suit, the Agency Commissioner refused to consider the leasing agreement for the east side of the mountain until the outcome of the lawsuit.
4. a. Objective of Recreational Properties: The main objective of Recreational Properties is to analyse the options and outcomes with respect to the package of options realistically available to them. 5. b. Decisions to be made: c. i. Exercise the options and acquire the three parcels or not. d. ii. If the options are exercised, either sell the property without any development or develop the property at an extra cost of approximately €5 million. 6. e. Uncertainties involved in the decisions: These observations might be directly extracted from the decision tree in appendix 1. a. iii. Lawsuit outcome: The main uncertainty that Recreational Properties faces is that of the outcome of the lawsuit which translates into either getting the lease for the east side of the mountain or not. This uncertainty is estimated at 50% probability thereby reducing the expected value by €3.7 million. b. iv. Reputation: The uncertainty of the popularity of the