Crystal Bay Case Study - Statistics Assignment Help

Assignment Task

Crystal Bay
Crystal Bay is an undeveloped 30 hectare coastal property site on a Malaysian island. The site’s owner, Jimmy Hoon, has secured outline permission to develop the site into tourist accommodation. However, he lacks the required capital and expertise to develop the site himself; instead he plans to sell it. There are two interested parties: Wildlife Wonders and New Horizons.
Although the site is zoned for residential development, that does not mean that the eventual developer will be allowed to build on the entire site. The planning authority will require a proportion of the site to be left as green area for public amenity. When the site’s buyer lodges a specific development plan, the planning authority will decide the exact number of hectares authorised for development. (There can be considerable variation from site to site and situation to situation.)
Wildlife Wonders has offered Jimmy a price that includes a lump sum plus an additional follow-up payment for each hectare that they are authorised to develop. Their offer is a €3.52 million lump sum and €1.056 million per hectare approved for development. (It typically takes a few months to obtain development authorisation and the payment per hectare would come in as soon as authorisation is obtained. However, Jimmy is not concerned about the time value of money and will count all cash flows as present-day values). Jimmy was very pleased with the Wildlife Wonders offer and was planning on accepting it, until he was contacted by New Horizons.
In discussions with Esther Kwon, the CEO of New Horizons, Jimmy learned that New Horizons is in talks with the local tourist authorities to develop a (non-residential) ecotourism centre in Tagua, the island’s largest national park. New Horizons is interested in making an offer to buy Crystal Bay because it is adjacent to Tagua and would be an ideal location to build tourist accommodation to complement their Tagua plans. Building tourist accommodation in Tagua itself is strictly forbidden.
In short, the Tagua ecotourism project would make Crystal Bay more valuable to New Horizons than to other prospective buyers. However, Esther Kwon acknowledged that the Tagua project is not guaranteed to go ahead. In fact she believes the probability of the Tagua project going ahead is 0.7. The Tagua discussions are expected to take another six months to complete and Jimmy needs to sell his site before then, so he negotiated a deal with Esther Kwon that allowed for two possible contingencies: what New Horizons would pay for the Crystal Bay site if the Tagua project proceeds, and what they would pay for Crystal Bay if the Tagua project is cancelled (since they would still be interested in buying Crystal Bay, even if the Tagua project is cancelled).
The negotiation closed with a proposal from New Horizons to pay €2.72 million in cash for the Crystal Bay site, PLUS EITHER €2.08 million per hectare approved for development in Crystal Bay (IF the Tagua project goes ahead), OR €0.512 million per hectare approved for development in Crystal Bay (IF the Tagua project does not go ahead).
“We believe our offer to be excellent”, said Esther Kwon. “There’s considerable upside potential for you in comparison to what other buyers are likely to pay, as long as you’re willing to share the downside risk by accepting lower prices in the event that Tagua doesn’t work out.” (The lump sum would be paid immediately and the per hectare payment at a later date, but as with the Wildlife Wonders proposal, Jimmy is not concerned about the time value of money and will count all cash flows as present-day values, so the timing of payments does not matter.)
Jimmy discussed the New Horizons offer with an independent consultant who is a leading expert on tourism development in Malaysia. The consultant pointed out that New Horizons and Esther Kwon were highly optimistic about their chances of reaching a successful agreement on the Tagua national park project. The expert said that a more realistic estimate of the likelihood of Tagua going ahead was actually only 0.4. Jimmy knew that this expert’s assessment was much more reliable than Esther Kwon’s, and accepted the expert’s assessment.
Jimmy told Wildlife Wonders that he had received another offer and that, subject to his evaluation of it, they might have to make an improved counteroffer. Wildlife Wonders responded by saying that they had another acquisition opportunity so they would not be improving their offer for Crystal Bay if they were outbid by another prospective buyer. Jimmy was certain that they were not bluffing and that their current offer was the best one they would make.
Before making his decision, Jimmy decided to gather some information about the number of hectares likely to be approved for development. He wanted to factor in the uncertainty about how much land would be approved for development, as this would directly affect the total price he would receive from either buyer. He gathered data about the number of hectares approved for development on other comparable 30-acre sites in the past ten years by the same local tourist authority, finding data on the approvals for over fifty sites of similar size and characteristics (see Appendix 1: Crystal Bay Table 1
Jimmy studied background files on all of the sites in the list and concluded that all were representative of the type of development potential present at Crystal Bay. There was clearly a significant range of possible outcomes. This information has made him realise that he shouldn’t simply use a single-point estimate for the number of approved development hectares; he wants his decision reflect the level of uncertainty by taking account of five different possible outcomes, using the bracket medians approach.

(a) Draw a decision tree that represents the decision that Jimmy has to make. Solve using the rollback process. Assume that his decision is based solely on expected value disregarding taxes, inflation and time value of money. Make a recommendation based on your findings. In your accompanying report, clearly explain the approach you took to modelling uncertainty in the problem, show any calculations or estimations you undertook, and demonstrate how you used the bracket medians method.
(b) Jimmy has thought about the difference between his probability estimate for the success of Tagua and the estimate made by Esther Kwon. He feels that this difference could enable him to develop a proposal that both he and New Horizons could accept.
After working through a number of possibilities, Jimmy has developed a proposal to put to Esther Kwon. His proposal is as follows:
New Horizons pays a cash sum of €3.84 million, plus EITHER
€1.344 million per hectare approved for development at Crystal Bay if the Tagua project goes ahead, OR
€1.024 million per hectare approved for development at Crystal Bay if the Tagua project does not go ahead.
Show Jimmy’s decision tree for this new proposal. What is his expected value?
(c) Esther Kwon is weighing up which offer is better: the one she had originally made to Jimmy Hoon, or Jimmy’s revised proposal outlined in (b) above. Draw a decision tree of how that decision looks from Esther Kwon’s perspective and indicate which proposal she would prefer if she wishes to minimise the expected price paid for Crystal Bay.

(d) Suppose that New Horizons is willing to accept Jimmy’s proposal outlined in (b). Prepare Jimmy’s cumulative risk profiles comparing the revised New Horizons proposal (i.e. Jimmy’s new proposal) with the Wildlife Wonders bid. Draw conclusions and make recommendations, indicating whether there is a dominant risk profile.

(e) Based on your findings in terms of both the expected value and risk profiles of Jimmy’s choices, what would you recommend?

This Statistics Assignment has been solved by our Statistics experts at My Uni Paper. Our Assignment Writing Experts are efficient to provide a fresh solution to this question. We are serving more than 10000+ Students in Australia, UK & US by helping them to score HD in their academics. Our Experts are well trained to follow all marking rubrics & referencing style.