Based on the information provided in the case study
docx
keyboard_arrow_up
School
Trine University *
*We aren’t endorsed by this school
Course
AUDITING
Subject
Finance
Date
Nov 24, 2024
Type
docx
Pages
1
Uploaded by MasterScience9621
Based on the information provided in the case study, Glenn Foreman, president of Oceanview
Development Corporation, must determine whether to “offer $5 million for a sealed-bid auction
property”, taking into account a variety of considerations and uncertainties. In making this decision,
there are various aspects and uncertainties to consider:
Probability of Winning the Auction: Glenn believes his “$5 million offer has a 0.2 chance of being the
highest”. This implies “a 20% likelihood of acquiring the property”.
Revenues and costs: If Oceanview acquires the land and the zoning amendment is authorized, it may
“produce $15 million in income while incurring $13 million in expenditures” (“$5 million for the property
and $8 million in building expenses”).
Glenn must make a strategic decision in light of these factors:
Submitting the offer: Glenn can submit a “$5 million offer with a certified cheque for $500,000 as a
deposit by August 15”. If he wins, this deposit will be used as a down payment. If the zoning change is
not authorized, the best alternative is to surrender the deposit.
Survey Results: The survey results will be critical in making the decision. If the survey results show that
the zoning change is likely to be accepted, Oceanview may proceed with the bid. In contrast, if the
survey indicates a low possibility, it may be prudent to forfeit the deposit.
Recommendations:
●
Before making a final choice, Oceanview should wait for survey results on August 1. They can
proceed with the offer if the survey suggests a high possibility of the zoning change being approved.
Otherwise, they should forfeit the deposit.
●
They should also examine alternate eventualities, such as the future resale value of the property.
●
To minimize financial losses, a contingency plan should be in place.
In conclusion, Glenn Foreman should wait for the survey findings before choosing by submitting the
offer. Oceanview will make the optimal strategic decision for this property purchase if the probability and
potential consequences are carefully considered.
Write the exact content as the one above but with different wording.
Discover more documents: Sign up today!
Unlock a world of knowledge! Explore tailored content for a richer learning experience. Here's what you'll get:
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Related Documents
Related Questions
Manny Carson, certified management accountant and controller of Wakeman Enterprises, has been given permission to acquire a new computer and software for the company’s accounting system. The capital investment analysis showed an NPV of $100,000. However, the initial estimates of acquisition and installation costs were made on the basis of tentative costs without any formal bids. Manny now has two formal bids, one that would allow the firm to meet or beat the original projected NPV and one that would reduce the projected NPV by $50,000. The second bid involves a system that would increase both the initial cost and the operating cost.
Normally, Manny would take the first bid without hesitation. However, Todd Downing, the owner of the firm presenting the second bid, is a close friend. Manny called Todd and explained the situation, offering Todd an opportunity to alter his bid and win the job. Todd thanked Manny and then made a counteroffer.
Todd: Listen, Manny, this job at the original…
arrow_forward
Jane is asked to evaluate whether it would be better to lease an asset or to borrow money from the
bank to buy the asset. The NPV from buying the asset is calculated to be $30,000. The NPV for the
lease versus borrow to buy analysis is calculated to be $500. Which of the following statements best
describe the lease versus buy decision for this investment?
None of the other statements is correct.
More than one of the other statements is correct.
O As the asset has positive NPV, Jane indifferent between leasing the asset or borrowing to buy it.
O Jane should lease the asset because her company would be better off by $30,000 compared to borrowing to
buy the asset.
O Jane should lease the asset as long as the NPV for the lease versus borrow to buy analysis is positive.
arrow_forward
Suppose the company plans to use a building that it owns to house the project. The building could be sold for $5 million after taxes and real estate commissions. How would that fact affect your answer?
The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible after-tax sale price must be charged against the project as a cost.
The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible before-tax sale price must be charged against the project as a cost.
The potential sale of the building represents an externality and therefore should not be charged against the project.
The potential sale of the building represents a real option and therefore should be charged against the project.
The potential sale of the building represents a real option and therefore should not be charged against the project.
-Select-IIIIIIIVV
arrow_forward
Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,800, $10,800, and $17,000 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 12 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?
arrow_forward
Devon Corporation is trying to decide whether to lease or purchase a piece of equipment. The total cost to lease the equipment will be $156,500 over its estimated life, while the total cost to
buy the equipment will be $122.600 over its estimated life. At Devon's required rate of return, the net present value of the cost of leasing the equipment is $110,600 and the net present value of
the cost of buying the equipment is $125.500. Based on financial factors. Devon should:
Multiple Choice
lease the equipment, saving $33.900 over buying
buy the equipment, saving $33,900 over leasing
ease the equipment, saving $14,900 over buying
buy the equipment, saving $14,900 ever leasing
arrow_forward
Alexander Industries is considering purchasing an insurance policy for its new officebuilding in St. Louis, Missouri. The policy has an annual cost of $10,000. If Alexander Industriesdoesn’t purchase the insurance and minor fire damage occurs, a cost of $100,000is anticipated; the cost if major or total destruction occurs is $200,000. The costs, includingthe state-of-nature probabilities, are as follows:
a. Using the expected value approach, what decision do you recommend?
arrow_forward
You have an opportunity to acquire a property from First Capital Bank. The bank recently obtained the property from a borrower who defaulted on his loan. First Capital is offering the property for $200,000. If you buy the property, you believe that you will have to spend (1) $10,500 on various acquisition related expenses and (2) an average of $2,000 per month during the next 12 months for repair costs, and so on, in order to prepare it for sale. Because First Capital Bank would like to sell the property as soon as possible, it is willing to provide $180,000 in financing at 4.25 percent interest for 12 months payable monthly (interest only). Your market research indicates that after you repair the property, it may sell for about $225,000 at the end of one year. Furthermore, you will probably have to pay about $3,000 in fees and selling expenses in order to sell the property at that time.
If you wanted to earn a 20 percent return compounded monthly, do you believe that this would be a…
arrow_forward
You have been asked by the president of your company to evaluate the proposed acquisition of a spectrometer for the firm’s R&D department. The equipment’s base price is $140,000, and it would cost another $30,000 to modify it for special use by your firm. The spectrometer, which falls into the MACRS 3-year class, would be sold after 3 years for an expected salvage value of $60,000. Use of the equipment would require an increase in spare parts inventory of $8,000. The spectrometer is expected to save the firm $80,000 per year in before-tax operating costs (i.e. effectively, there is an $80,000 cash inflow each year, excluding depreciation and tax effects). The firm’s marginal tax rate is 40%, and the cost of capital is 12%. Evaluate this decision using the NPV decision criteria. Should the firm buy the spectrometer?
A) Yes, the project yields an NPV of $23,684.31B) Yes, the project yields an NPV of $25,390.45C) Yes, the project yields an NPV of $24,599.59D) No, the project yields an…
arrow_forward
Adidas is evaluating a proposal for a new product. If they launch the product, they will use an existing facility in the production process, which they previously acquired for
$4
million. They currently lease it to a third party, and they expect to continue to do so if they don't use it for the new product. They rent it out for
$102,000
and they expect that to remain flat for the foreseeable future. The project requires immediate investment in CAPX of
$1.3
million, which will be depreciated on a straight-line basis over the next 10 years for tax purposes. The project will end after eight years, at which time they expect to salvage some of the initital CAPX and sell it for
$469,000.
The project requires immediate working capital investments equal to 10% of predicted first-year sales. After that, working capital will remain at 10% of the following year's expected sales. They expect sales to be
$4.6
million in the first year and to stay constant for eight years. Total…
arrow_forward
What is the bid price for the following situation: You have been approached by a client interested in buying 130,000 widgets a year from you for 5 years and has asked you to submit a bid for his consideration. To be able to produce these widgets, you need to invest in $830,000 in equipment. The equipment has a taxable life of 10 years and will be depreciated using straight line. At the end of the 5 years, the equipment can be sold for $60,000 (market or scrap value). The variable cost of producing the widgets is $8 per unit and you will incur in a fixed cost of $210,000 a year. You have estimated you will need $70,000 today in working capital. The appropriate discounting rate for this type of projects is 14%. The corporate tax rate applicable to you in this case is 30%. What is the minimum price you would charge for each widget (bid price to be given by you to the client)?
arrow_forward
what is the sale price?
arrow_forward
Scenario:Suppose that your client, a real estate investor, has asked you to evaluate an anchored retail shopping center that is for sale for $3,595,000 in Clearwater, Florida. You have been asked to perform an analysis of the property, including an estimate of cash flows and IRR, and to make a recommendation on whether or not your client should purchase the property. For this analysis, assume a five-year holding period.
The shopping center has 33,250 square feet of rentable space. Since detailed information is not available on existing leases, assume that the property will lease at the average rent for the Tampa/St. Petersburg market. The average asking rent for Tampa is $12.90, and the average vacancy rate is 6.5%. Assume that rents will increase by 5% per year.
Annual expenses are as follows:
Insurance: $12,312
Utilities: $14,500
Real Estate Taxes: $34,200
Cleaning: $4,500
Landscaping: $9,400
Repairs & Maintenance: $16,500
Miscellaneous: $6,000
These expenses will increase at…
arrow_forward
Condo Construction Company is bidding on an important construction job. The job will cot $2 million to complete. One other company is bidding for the job. Condo believes that the opponent's bid is equally likely to be any amount between $2 million and $4 million. If Condo wants to maximize its expected profit, what should it's bid be?
arrow_forward
You have an opportunity to acquire a property from First Capital Bank. The bank recently obtained the property from a borrower who defaulted on his loan. First Capital is offering the property for $200,000. If you buy the property, you believe that you will have to spend (1) $10,500 on various acquisition-related expenses and (2) an average of $2,000 per monthduring the next 12 months for repair costs, etc., in order to prepare it for sale. Because First Capital Bank would like to sell the property as soon as possible, it is willing to provide $180,000 in financing at 8 percent interest for 12 months payable monthly (interest only). Your market research indicates that after you repair the property, it may sell for about $225,000 at the end of one year. Furthermore, you will probably have to pay about $3,000 in fees and selling expenses in order to sell the property at that time. If you wanted to earn a 20 percent return compounded monthly, do you believe that this would be a good…
arrow_forward
You have an opportunity to acquire a property from First Capital Bank. The bank recently obtained the property from a borrower who
defaulted on his loan. First Capital is offering the property for $218,000. If you buy the property, you believe that you will have to spend
(1) $10,800 on various acquisition-related expenses and (2) an average of $2,300 per month during the next 12 months for repair costs,
and so on, in order to prepare it for sale. Because First Capital Bank would like to sell the property as soon as possible, it is willing to
provide $198,000 in financing at 4.25 percent interest for 12 months payable monthly (interest only). Your market research indicates
that after you repair the property, it may sell for about $248,000 at the end of one year. Furthermore, you will probably have to pay
about $3,300 in fees and selling expenses in order to sell the property at that time.
Required:
a. If you wanted to earn a 20 percent returi compounded monthly, do you believe that this…
arrow_forward
SEE MORE QUESTIONS
Recommended textbooks for you

Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning

Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Related Questions
- Manny Carson, certified management accountant and controller of Wakeman Enterprises, has been given permission to acquire a new computer and software for the company’s accounting system. The capital investment analysis showed an NPV of $100,000. However, the initial estimates of acquisition and installation costs were made on the basis of tentative costs without any formal bids. Manny now has two formal bids, one that would allow the firm to meet or beat the original projected NPV and one that would reduce the projected NPV by $50,000. The second bid involves a system that would increase both the initial cost and the operating cost. Normally, Manny would take the first bid without hesitation. However, Todd Downing, the owner of the firm presenting the second bid, is a close friend. Manny called Todd and explained the situation, offering Todd an opportunity to alter his bid and win the job. Todd thanked Manny and then made a counteroffer. Todd: Listen, Manny, this job at the original…arrow_forwardJane is asked to evaluate whether it would be better to lease an asset or to borrow money from the bank to buy the asset. The NPV from buying the asset is calculated to be $30,000. The NPV for the lease versus borrow to buy analysis is calculated to be $500. Which of the following statements best describe the lease versus buy decision for this investment? None of the other statements is correct. More than one of the other statements is correct. O As the asset has positive NPV, Jane indifferent between leasing the asset or borrowing to buy it. O Jane should lease the asset because her company would be better off by $30,000 compared to borrowing to buy the asset. O Jane should lease the asset as long as the NPV for the lease versus borrow to buy analysis is positive.arrow_forwardSuppose the company plans to use a building that it owns to house the project. The building could be sold for $5 million after taxes and real estate commissions. How would that fact affect your answer? The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible after-tax sale price must be charged against the project as a cost. The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible before-tax sale price must be charged against the project as a cost. The potential sale of the building represents an externality and therefore should not be charged against the project. The potential sale of the building represents a real option and therefore should be charged against the project. The potential sale of the building represents a real option and therefore should not be charged against the project. -Select-IIIIIIIVVarrow_forward
- Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,800, $10,800, and $17,000 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 12 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?arrow_forwardDevon Corporation is trying to decide whether to lease or purchase a piece of equipment. The total cost to lease the equipment will be $156,500 over its estimated life, while the total cost to buy the equipment will be $122.600 over its estimated life. At Devon's required rate of return, the net present value of the cost of leasing the equipment is $110,600 and the net present value of the cost of buying the equipment is $125.500. Based on financial factors. Devon should: Multiple Choice lease the equipment, saving $33.900 over buying buy the equipment, saving $33,900 over leasing ease the equipment, saving $14,900 over buying buy the equipment, saving $14,900 ever leasingarrow_forwardAlexander Industries is considering purchasing an insurance policy for its new officebuilding in St. Louis, Missouri. The policy has an annual cost of $10,000. If Alexander Industriesdoesn’t purchase the insurance and minor fire damage occurs, a cost of $100,000is anticipated; the cost if major or total destruction occurs is $200,000. The costs, includingthe state-of-nature probabilities, are as follows: a. Using the expected value approach, what decision do you recommend?arrow_forward
- You have an opportunity to acquire a property from First Capital Bank. The bank recently obtained the property from a borrower who defaulted on his loan. First Capital is offering the property for $200,000. If you buy the property, you believe that you will have to spend (1) $10,500 on various acquisition related expenses and (2) an average of $2,000 per month during the next 12 months for repair costs, and so on, in order to prepare it for sale. Because First Capital Bank would like to sell the property as soon as possible, it is willing to provide $180,000 in financing at 4.25 percent interest for 12 months payable monthly (interest only). Your market research indicates that after you repair the property, it may sell for about $225,000 at the end of one year. Furthermore, you will probably have to pay about $3,000 in fees and selling expenses in order to sell the property at that time. If you wanted to earn a 20 percent return compounded monthly, do you believe that this would be a…arrow_forwardYou have been asked by the president of your company to evaluate the proposed acquisition of a spectrometer for the firm’s R&D department. The equipment’s base price is $140,000, and it would cost another $30,000 to modify it for special use by your firm. The spectrometer, which falls into the MACRS 3-year class, would be sold after 3 years for an expected salvage value of $60,000. Use of the equipment would require an increase in spare parts inventory of $8,000. The spectrometer is expected to save the firm $80,000 per year in before-tax operating costs (i.e. effectively, there is an $80,000 cash inflow each year, excluding depreciation and tax effects). The firm’s marginal tax rate is 40%, and the cost of capital is 12%. Evaluate this decision using the NPV decision criteria. Should the firm buy the spectrometer? A) Yes, the project yields an NPV of $23,684.31B) Yes, the project yields an NPV of $25,390.45C) Yes, the project yields an NPV of $24,599.59D) No, the project yields an…arrow_forwardAdidas is evaluating a proposal for a new product. If they launch the product, they will use an existing facility in the production process, which they previously acquired for $4 million. They currently lease it to a third party, and they expect to continue to do so if they don't use it for the new product. They rent it out for $102,000 and they expect that to remain flat for the foreseeable future. The project requires immediate investment in CAPX of $1.3 million, which will be depreciated on a straight-line basis over the next 10 years for tax purposes. The project will end after eight years, at which time they expect to salvage some of the initital CAPX and sell it for $469,000. The project requires immediate working capital investments equal to 10% of predicted first-year sales. After that, working capital will remain at 10% of the following year's expected sales. They expect sales to be $4.6 million in the first year and to stay constant for eight years. Total…arrow_forward
- What is the bid price for the following situation: You have been approached by a client interested in buying 130,000 widgets a year from you for 5 years and has asked you to submit a bid for his consideration. To be able to produce these widgets, you need to invest in $830,000 in equipment. The equipment has a taxable life of 10 years and will be depreciated using straight line. At the end of the 5 years, the equipment can be sold for $60,000 (market or scrap value). The variable cost of producing the widgets is $8 per unit and you will incur in a fixed cost of $210,000 a year. You have estimated you will need $70,000 today in working capital. The appropriate discounting rate for this type of projects is 14%. The corporate tax rate applicable to you in this case is 30%. What is the minimum price you would charge for each widget (bid price to be given by you to the client)?arrow_forwardwhat is the sale price?arrow_forwardScenario:Suppose that your client, a real estate investor, has asked you to evaluate an anchored retail shopping center that is for sale for $3,595,000 in Clearwater, Florida. You have been asked to perform an analysis of the property, including an estimate of cash flows and IRR, and to make a recommendation on whether or not your client should purchase the property. For this analysis, assume a five-year holding period. The shopping center has 33,250 square feet of rentable space. Since detailed information is not available on existing leases, assume that the property will lease at the average rent for the Tampa/St. Petersburg market. The average asking rent for Tampa is $12.90, and the average vacancy rate is 6.5%. Assume that rents will increase by 5% per year. Annual expenses are as follows: Insurance: $12,312 Utilities: $14,500 Real Estate Taxes: $34,200 Cleaning: $4,500 Landscaping: $9,400 Repairs & Maintenance: $16,500 Miscellaneous: $6,000 These expenses will increase at…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning

Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning

Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning