Executive Summary
Oceanview is considering a property bid of $5 million, which would require them to submit a deposit of 10% of the bid amount. Should the bid be rejected, the deposit will be refunded. However, should Oceanview win the bid, they must still consider the approval of zoning change to built the condominium. If the zoning is approved, the building can start. If not, the 10% deposit will be forfeited.

From the flow summarized above, we can see that the green light to carry on building is dependent on the approval of the zone change, highlighting the need for Oceanview to determine the probability of winning the bid as well as the zoning change approval.

The timeline given below reflects Oceanview window of opportunity for it to conduct its market research before submitting its bid. This market research is key to Oceanview outcome to build the condominium since it would provide information as to whether the zoning would be approved.

Recommendation
Oceanview should consider the dynamic environment and invisible cost that might be incurred on top of the information provided by the market research.

Firstly, in today’s volatile and post recession environment, Oceanview must evaluate if a luxury condominium would sell well. With pay cuts and retrenchment, many would opt for a more conservative option of owing a HBD instead on spending lavishly on a condominium. Moreover, the soaring real estate prices would deter many, hence resulting in the Oceanview’s revenue outlook to be too optimistic.

Secondly, the opportunity cost in investing in an alternative project, which may possibly reap higher returns in such an economic environment, is high. With the need for a referendum for zoning change, Oceanview may be better off investing in a project that is approved by the current zoning. Hence, avoiding the cost of the market research.

However, despite the abovementioned points, the importance of a market research cannot be downplayed as it provides a guide for Oceanview’s decision. Without the market research, Oceanview is assuming a huge risk that the zoning would not be approved and the deposit forfeited. By evaluating its company’s portfolio, Oceanview should assess if this assumption of risk would result in a loss too large for its reserve. Using the concept of behavioural economics, losses hurt the company more than gains even if the amount of loss and benefit are the same. This can be seen by the steep gradient for losses on the left and the gentler slope for gains on the right, with respect to the actual dollar value represented by the red line passing through the origin, as seen in the figure below.

Therefore, from a conservative standpoint, Oceanview may still decide on submitting the bid to avoid the losses.

In conclusion, by considering all aspects of making the decision to employ the market research, while the numerical results point that the cost of the market research services is lower than the expected costs of research ($15,000 < $28,992.50), Oceanview must reconcile its risk appetite, potential losses, and psychological barriers before making a final decision. If the market research comes out favourable of the zoning change, Oceanview should submit the bid. Otherwise, the bid should not be submitted.

2 Data Analysis 2.1 Decision Tree

R

R
S3, P(S3) = 0.2
S3, P(S3) = 0.2

S1, P(S1|A) = 0.6585
S1, P(S1|A) = 0.6585
S2, P(S2|A) = 0.3415
S2, P(S2|A) = 0.3415
S1, P(S1|N) = 0.0508
S1, P(S1|N) = 0.0508
S2, P(S2|A) = 0.9492
S2, P(S2|A) = 0.9492
S1, P(S1) = 0.3
S1, P(S1) = 0.3
S2, P(S2) = 0.7
S2, P(S2) = 0.7
S3, P(S3) = 0.2
S3, P(S3) = 0.2
S4, P(S4) = 0.8
S4, P(S4) = 0.8
S3, P(S3) = 0.2
S3, P(S3) = 0.2
S4, P(S4) = 0.8
S4, P(S4) = 0.8
S4, P(S4) = 0.8
S4, P(S4) = 0.8
S3, P(S3) = 0.2
S3, P(S3) = 0.2
A, P(A) = 0.41
A, P(A) = 0.41
N, P(N) = 0.59
N, P(N) = 0.59
Payoff ($Mil)
Payoff ($Mil)
1
1
2
2
3
3
6
6
4
4
74532424
74532424
2.0
2.0
-0.5
-0.5
0
0
0
0
2.0

2.0

-0.5
-0.5
0
0
0
0
No Market Research Study

R
No Market Research Study

R
Market Research Study

R
Market Research Study

R

R

R

d1

R d1 R d2 R d2 R d1 R d1 R d2 R d2 R

R

R

R

R
5
5
8
8
2
2
-0.5
-0.5
0
0
0
0 d1

R d1

R d2

R d2

R

R

R
9
9

MAX EV = $50,000

MAX EV = $50,000

MAX EV = $0 MAX EV = $0 MAX EV = $229,250 MAX EV = $229,250 MAX EV = $93,992.50 MAX EV = $93,992.50

100000
100000

1111
1111

Notes to Decision Tree: 1. The payoffs stated in the decision tree are inclusive of property costs $5,000,000 and construction expense $8,000,000. 2. Market research cost of $15,000 is excluded in the payoff, expected values and the data analysis in this section. The cost is recognized in the final conclusion in Section 3.

2.2 Without Market Research Where market research information is not available, we would only be required to look at the section of the decision tree denoting Decision Node 5 and Chance Nodes 8 and 11.

With reference to the decision tree: EV (Node 11) = 0.3(2.0) + 0.7 (-0.5) = 0.25 EV (Node 8) = 0.2(0.25) + 0 = 0.05 EV (Node 5) = Max (0.05, 0) = 50,000 (d1) The EV of Node 11, being $250, 000, represents the EV when ODC makes a successful bid for the property.

The EV of node 8 is $50, 000 (d1). This value represents the maximum EV when ODC decides to submit a bid for the property.

In the event that ODC does not submit any bid (d2), the EV would be $0.

Comparing the two expected values, it is recommended that ODC submits a bid as the EV of d1 is $50,000 higher than that of d2 being $0.

2.3 With Market Research Prediction of Zoning Change Approval With reference to the decision tree: EV (Node 9) = 0.6585(2.0) + 0.3415(-0.5) = 1.1463 EV (Node 6) = 0.2(1.1463) + 0 = 0.22925 EV (Node 3) = Max (0.22925, 0) = 0.22925 (d1)
Given that the market research predicts that the zoning change will be approved, the EV of a successful bid for the property when ODC submits a bid is represented by Node 9, being $1,146,300. The EV of Chance Node 6 (d1), being $229,250, represents the EV when OCD makes a bid for the property, be it successful or not.

In the event that ODC does not submit any bid (d2), the EV would be $0.

The EV of Decision Node 3 is $229,250 being the higher of the EVs of Chance Node 6 and 9. It represents the EV when ODC submits a bid. Therefore, it is recommended that a bid is to be submitted when market research predicts that the zoning change will be approved. Prediction of Zoning Change Not Approved With reference to the decision tree: EV (Node 10) = 0.0508(2.0) + 0.9492(-0.5) = -0.3730 EV (Node 7) = 0.2(-0.3730) + 0 = -0.07460 EV (Node 4) = Max (-0.07460, 0) = 0 (d1)

Given that the market research predicts that the zoning change will be not be approved, the EV of ODC submitting a successful bid is -$373,000, represented by Chance Node 10.

The EV of Chance Node 7 represents the EV when ODC makes a bid for the property. The EV of this decision (d1) is -$74,600.

In the event that ODC does not submit any bid (d2), the EV would be $0.

By comparing the EVs of the 2 decisions, a bid should not be submitted when market research predicts that the zoning change will not be approved.

2.4 Should Market Research firm be Employed
With reference to the Decision Tree and analysis above, if market research is not carried out, the EV is $50,000. If market research is carried out, the EV is $93,992.50.

The Expected Value without Sample Information (EVwoSI) is thus $50,000.

The Expected Value with Sample Information (EVwSI) is then $93,992.50.

To find the maximum value (EVSI) that ODC will be willing to pay for market research, we subtract EVwoSI from EVwSI. Expected Value of Sample Information (EVSI) = EVwSI – EVwoSI = $93,992.50 - $50,000 = $43,992.50 Since market research only costs $15,000, lesser than EVSI of $43,992.50, ODC should conduct the market research. However, should the cost of market research rise above $43,992.50, ODC should not hire a market research firm.