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 …show more content…
Our recommendation is therefore to NOT exercise the options and to invest in the second project.

6. 9. Extending the Option 1. s. One Year negotiation of maturity date: t. Based on the time line, a one year extension will allow switching the decision and the chance nodes. We would be able to make our decision regarding the land purchasing after the choice of the European agency regarding the leasing. We therefore eliminate some risks (acquiring the lands while the lease is not accorded). The result is also a highest expected value of 3.4625 million. (see resulting decision tree in appendix 9). 2. u. Worth of One year extension: * v. This can be seen as the value of perfect information. This is calculated as the difference between the expected profit without the one year extension and the expected profit with the extension (3.4625 - 1.7125 = 1.7 million). 3. w. 4. x. Comparison with the loss of value due to lawsuit: * y. The opportunity loss calculated in section 2 was 3.1725 million. Therefore, extending the options validity will not allow recovering completely from the uncertainty on the leasing. Indeed, insuring the correct decision by knowing the lawsuit outcomes will allow to get rid of some of the less profitable branches of the tree, but the uncertainty remains, leading to averaging highly profitable returns with less profitable returns. This leads to a lower expected value