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DRA Assignment 2 – Recreational Properties
1) FRAMING THE DECISION
1.a) Decisions
a) He can exercise the option and buy the land. In this case, the possible decisions are:
a.1) Sell the land without any development
a.2) Develop the land with a development cost of £ 5 million and the sell it for a higher profit
b) He can avoid to exercise the option and invest in another investment that will give to him a certain profit.
c) Try to negotiate an option extension in order to be able to delay his decisions until the suit is settled and the risk of not getting the lease does not affect his decision anymore.
d) For the purpose of this analysis we are assuming that the price of the option will remain constant. Otherwise another possible decision that Anders may make is whether to sell the option to third parties and eventually recover part of his investments.
1.b) Factors of uncertainty
a) Legal suit outcome: the payoff of his decision is subject to the outcome of the lawsuit that may not allow the development of land parcels on East side of White Mountain.
b) Reputation: the success of his initiative and the consequent return on his investment are conditioned by the popularity that the location will have, as for instance the quality of the snow and of the ski runs. Due to their nature, these are unpredictable factors that Anders cannot control.
1.c) Objective
The objective of Recreational Properties is to maximise the payoff coming from this investment as well as minimising the risk of incurring eventual losses. Since it is a sunk cost, we are not considering the price of the option in our payoff calculations because it does not affect in any way the choice of the best possible decision. In addition, in order to understand the best decision we also assumed that Anders is neutral to risk, otherwise some considerations may change.
2) THE EMERGENCY MEETING
2.a)

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