ADM2302 WestCo Associates, Inc. a property development firm

ADM2302 -Summer 2016

Instructor: Davood Astaraky
Assignment four
Decision Analysis

• This is a group assignment and can be done in a group of two, three or four students, or individually.
• Solution to this case study should to be prepared using the Report to Management format provided in
the course outline.
• Make sure to include clear managerial statements that communicate the results of the analyses and the
recommended decisions to be made.
• Please note that submitted assignments must be neat, readable, and well- organized. Assignment marks
will be adjusted for sloppiness, poor grammar and spelling, as well as for technical errors.
• You need to submit only ”one” copy for your group that includes the name of all the group members on
the front page. Don’t forget to complete your signed statement of Academic Integrity within the body of
your solution.
• Submit a PDF of your type-written (i.e., not handwritten) solution via blackboard learn by due-date
Tuesday, July 26, 11:59 P.M.

Case study description.
WestCo Associates, Inc. a property development firm, purchased an old house near the town square in Niagara
Falls, where Niagara University is located. The old house was built in the mid-1800s, and WestCo Associates
re stored it. For almost a decade, WestCo has leased it to the university for academic office space. The house
is located on a wide lawn and has become a town landmark.
However, in 2008, the lease with the university expired, and WestCo Associates decided to build high-density
student apartments on the site, using all the open space. The community was outraged and objected to the town
council. The legal counsel for the town spoke with a representative from WestCo and hinted that if WestCo
requested a permit, the town would probably reject it. WestCo had reviewed the town building code and felt
confident that its plan was within the guidelines, but that did not necessarily mean that it could win a lawsuit
against the town to force the town to grant a permit.
The principals at WestCo Associates held a series of meetings to review their alternatives. They decided that
they had three options: They could request the permit, they could sell the property, or they could request a
permit for a low-density office building, which the town had indicated it would not fight. Regarding the last
two options, if WestCo sells the house and property, it thinks it can get $900,000. If it builds a new office
building, its return will depend on town business growth in the future. It feels that there is a 70% chance of
future growth, in which case WestCo will see a return of $1.3 million (over a 10-year planning horizon); if no
growth (or erosion) occurs, it will make only $200,000.
If WestCo requests a permit for the apartments, a host of good and bad outcomes are possible. The immediate
good outcome is approval of its permit, which it estimates will result in a return of $3 million. However, WestCo
gives that result only a 10% chance that it will occur. Alternatively, WestCo thinks there is a 90% chance that
the town will reject its application, which will result in another set of decisions.
WestCo can sell the property at that point. However, the rejection of the permit will undoubtedly decrease the
value to potential buyers, and WestCo estimates that it will get only $700,000. Alternatively, it can construct

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ADM2302 -Summer 2016

Instructor: Davood Astaraky

the office building and face the same potential outcomes it did earlier, namely, a 30% chance of no town growth
and a $200,000 return or a 70% chance of growth with a return of $1.3 million. A third option is to sue the
town. On the surface, WestCo’s case looks good, but the town building code is vague, and a sympathetic judge
could throw out its suit. Whether or not it wins, WestCo estimates its possible legal fees to be $300,000, and
it feels it has only a 40% chance of winning. However, if WestCo does win, it estimates that the award will be
approximately $1 million, and it will also get its $3 million return for building the apartments. WestCo also
estimates that there is a 10% chance that the suit could linger on in the courts for such a long time that any
future return would be negated during its planning horizon, and it would incur an additional $200,000 in legal
fees.
If WestCo loses the suit, it will then be faced with the same options of selling the property or constructing an
office building. However, if the suit is carried this far into the future, it feels that the selling price it can ask
will be somewhat dependent on the towns growth prospects at that time, which it feels it can estimate at only
50-50. If the town is in a growth mode that far in the future, WestCo thinks that $900,000 is a conservative
estimate of the potential sale price, whereas if the town is not growing, it thinks $500,000 is a more likely
estimate. Finally, if WestCo constructs the office building, it feels that the chance of town growth is 50%, in
which case the return will be only $1.2 million. If no growth occurs, it conservatively estimates only a $100,000
return.
A. Perform a decision tree analysis of WestCo Associates’s decision situation, using expected value, and indicate
the appropriate decision with these criteria.
B. Indicate the decision you would make and explain your reasons.