Waldorf Property Development Case Study. In order to evaluate the benefits that Pflug Enterprises will have from investing into Waldorf Property, the numerical value of ROI is used.

by gounamouta (student)

University Degree Business and Administrative studies

1. Overview of the case

Considering the current time frame as a period two weeks before February 16, 1989 Mr. Miller would have to make a recommendation to Pflug’s Management Committee as to the continuation, cancellation, or negotiation of the contract concerning the Waldorf Property.

Primary decisions Miller should make;

Buy the Waldorf Property and proceed with the appropriate actions in order to start the construction works.

Decide to cancel the purchase and terminate the agreement without penalty before the February 16.

Major Key Uncertainty that may affect the expected cash flow;

The amount of acres of Wetlands that the Corps of Engineers will determine that there are in the property and that cannot be used for development.

Other Uncertainties that may affect the expected cash flow;

The Price regarding the sale of the outparcels. According Alan Levine (the commercial sales agent) the average selling price will be at $10.28 per square foot but a dramatically shift in the market will cause a ± $2 difference in price.
The number of units sold every month. According to Ms. Palmer (BuildAmerica’s sales manager) after the completion, the units should sell at a rate of 2 per month, but that number for any given month could be between zero and four.
The average selling price of the units. According to Ms. Palmer the average price should be at $120.00 per square foot. On the other side, she pointed out that the volume of new development could drive the average selling price $20.00 per square foot in either direction. In a more reasonable perspective, the average selling price would be within $6.00 of the asking price.
A 3% contingency in the development costs of the buildings.

2. Forming the case model

In order to evaluate the benefits that Pflug Enterprises will have from investing into Waldorf Property, the numerical value of ROI is used. Also we calculated the net present value of the future cash flows in terms of February 1989.

The major uncertainties were modeled in our study with some probability functions, and a large number of simulations occurred in order to have an idea about the possible outcome of the investment. More specific;

In order to determine the amount of acres of wetland that the Corps of Engineers ...

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2. Forming the case model

In order to determine the amount of acres of wetland that the Corps of Engineers will decide that cannot be used, we used a triangular distribution function with an expected value of 82500 ft2, a minimum value of 0 and a maximum value of 217500 ft2. The reason we used a triangular distribution and not a normal one is that these distributions are used to describe what we know or believe about some unknown variables. The triangular distribution is a good-enough approximation to whatever the real distribution might be. They are also practical as they easy to specify and there is no assumption of symmetry and that is why they are common in business analytics.

For the lands price, we used a normal distribution with a mean of $10.28 (as the suggested price was) and a standard deviation of $0.6 (in order to get the necessary range of $4 in price).

For the number of units sold every month;

Prior to the completion of the construction we used a discrete uniform distribution, with a range of 8 units.

For the units sold every month, we used a discrete uniform distribution, with a range of 5 units.

For the average selling price of the units, we used a logistic distribution with parameters a=120 and b=2.93. The reason we chose this distribution was that we wanted the 80% of the random average selling price to be between $114.00 and $126.00 but also have a range of $40.00.

For the contingency in the development cost, we used a normal distribution with a mean of %100 and a standard deviation of %1 (in order to get the necessary range of 6%).

3. Risk Analysis Results

Waldorf Land Development

As long as concerning the first part of the investment, the projected cash flow, under Miller’s assumptions is $743,463 (without having estimated the beginning deposit of $150,000) with a ROI of 17%. Taking into account the probability distributions of the uncertainties the case model simulation gives a mean Cash Flow of $569,465 and an average ROI of 13,3%.

Also the following Graphs show that there is a 13,9% probability that the ROI could be negative and a 83,6% to be less than 25.

Waldorf BuildAmerica Development

As long as concerning the second part of the development, the projected cash flow in values of June 90 under Mr. Miller’s assumptions is $1,312,036 and the ROI is 31,2%. Taking into account the probability distributions of the uncertainties the case model simulation gives a mean Cash Flow of $1,393,727 and an average ROI of 33,2%.

As we can see in the graphs, this part of the investment is very profitable for the company, as it has a minimum risk and a high chance of succeed.