1. Framing the Decision
Our objective is to maximise Anders Forsgen’s financial return from this developmental deal while keeping into account the fact that we have other option beyond this deal.
We have two primary decisions to make viz. whether: a) we should exercise our option to buy The White Mountain Development, and,
b) If we should develop White Mountain further to aim for higher returns
The development of White Mountain is attractive because as it only involves incremental capital costs, and no loss in time in terms of selling the development.
These two decisions and the net pay off would be influenced by two key uncertainties viz. whether
a) we would get the lease or not (now in …show more content…
5. Meeting the landowners
The six-month extension increases our average payoff from 1.71 to 2.72, which is an increase of 1.01 million. This increase is due to the reduction (not the elimination) of the uncertainty of being granted the lease. After the court decision we can be much more certain about the possibility of the outcome of the hearings.
The price of the one-year extension was 1.75 Vs. 1.01 for the six month one. This is being driven by the fact that a one year extension completely eliminated our uncertainty of being granted the lease while the six month one only reduced it.
6. The Final Negotiation
As we understand it, Anders’ two options are
a) no extension whatsoever (Avg Value 1.71) vs.
b) six month extension (Avg Value 2.07)
If the probability of a favourable court ruling were less than 11% then we should NOT buy the option and if the probability of a favourable court ruling more than 56% we should again NOT buy the option. The sweet spot essentially between these two