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Review Questions for Case 3 To sell or not to sell... About 10-(Answered)


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I am needing help with the review questions for this case.? Please see case background, review questions and data attached.? This will need to be presented in excel or power point.? Please see questions highlighted in red.? Please let me know if you have questions.?

Review Questions for Case 3


To sell or not to sell?


About 10 years ago, Bill bought about 5 acres in a small town that had enjoyed better-than-average


growth, due in large part to the little town being in a transient area. A military base was located nearby,


and a lot of the soldiers and their families live in the small town for two to three years while stationed at


the military post. Shortly after he bought the lot, he built his first of four self-storage buildings. There


was already another self-storage business in this small town which had three different locations, so he


was relatively skeptical about his chances of being profitable in this business. The first building had 5410x10 units and a total of 5,450 square feet is under roof. Within a couple of years, all the units were


rented, so he built a second building, but this time he added some climate controlled units. A couple of


years passed and it filled up, so he built a third building. When it filled up, he built a fourth building.


After completion of the fourth building, he had 218 units with about 32,750 square feet and had


invested about $1 million over the 10 years. His total revenue is about $16,000 per month and after he


pays his expenses and taxes he has about 6,000 per month in profit.


Everything was going good?Bill was minding his own business and one day his competitor walked in and


offered him $1.6 million for his business. Bill had recently completed a financial statement during which


he was required to have his business appraised. The appraisal came back and it indicated that the


business was worth $1.2 million.


Although Bill had no plans of selling his business prior to the offer, he was facing a difficult decision. He


had thought that he would eventually sell his business once he reached the age of 67 years old or so.


However, now he was wondering if he should sell his business now or keep it and sell it in 10 years.


What makes his decision more difficult is his competitor told him that if he (Bill) didn?t sell to him, he


(the competitor) was going to put a fourth facility in within a couple of miles of his (Bill?s) facility.


Currently, Bill?s 218 units are all rented. This would probably change once his competitor finished his


new facility but Bill doesn?t know how much it will change.


Leary of his appraisal, Bill sought to get more information on what the true value of his business really


is?. He questioned why his competitor was willing to give him $400,000 more than his most recent


appraisal. A friend put him in touch with a storage facility broker who provided him with 53 similar


facilities that were listed to be sold. (The spreadsheet is attached.) The listings had the city and state


(not included), the asking price, the square footage, and the number of units. Bill thought this


information could give him a better idea of the value of his facility. The only problem with the data is


that the listings are asking prices and the $1.6 million is a sells price. One might be able to use this listing


information in a regression model to gain some insight if the average difference between asking prices


and selling prices could be determined. If we could assume that the selling prices might be 10% less


than the asking price, does this information suggest that his business is worth $1.2 million, or closer to


$1.6 million?



By the time Bill had finished the four buildings, he had approximately $1,000,000 invested in the land


and buildings. If he sold it for $1.6 million, he would have to pay capital gains tax on about $600,000,


which he estimated to be about 20%. If this was the case, he could potentially walk away with about


$1,480,000. However, if he decided not to sell it, he would face some uncertainty over the next few


years. Although his competitor told him that he was planning to build a new facility a couple miles away,


Bill thought that there might be a 30% chance that he was bluffing. Even if he was not bluffing, it had


been reported in the national news that there could be significant military cuts in the next few years


which could really put a dent in his annual revenue. Roughly 80% of his business was military personnel,


so if the cuts were made, it could hurt Bill. Bill thought that there was only a 20% chance that the


military cuts would actually happen. If Bill didn?t sell, he would know whether or not his competitor was


bluffing in just a couple of months. However, the military cuts could take a couple of years to materialize


if, in fact, there were military cuts.


Before his competitor approached Bill, he thought that he could continue to grow his business for the


next ten years at a rate of about 11% to $4.20 million, assuming that there were no military cuts. He


would probably try to find a buyer to sell to at that time. Bill figured that after he paid capital gains taxes


he would end up with $3.51 million. However, if there were military cuts, it would damage his revenue


and his business would only grow at a rate of 9% to $3.50 million. After taxes, that would be $2.80


million. If his competitor was not bluffing, and decided to build, his business would grow at 7% per year


and would be worth $1.76 million after the capital gains taxes were paid assuming the military cuts were


made. If the cuts were not made and the competitor decided to build then the company would grow at


a rate of 7% to an after tax value of $2.08 million.


Bill thought that if he did decide to sell, he would invest his after-tax earnings. His accountant told him


that he was not a candidate for a 1031 exchange (Internal Revenue Service Code Section 1031) since Bill


wanted to take some of the money and pay off some of his personal debt. Therefore, Bill would have to


pay capital gains tax on the $600,000 profit, but afterwards would have $1,480,000 to invest. (For


simplicity and purposes of this case, we are going to assume that Bill will invest the entire amount in a


single area.) Bill thought that he would either invest in the stock market or invest in real estate. If he


invested in the stock market, he would be facing the fact there might be a bearish market for much of


the next 10 years. He felt like there was a 50% chance that would happen, making the chances for a


bullish market about 50%. If he invested in the market, he felt that there were two major avenues of


investing?to be fairly aggressive or to be conservative. Bill had talked to an investment advisor and


learned that if he invested in an aggressive fashion and a bull market persisted then he would make


about 10% per year over the next 10 years, which would give him about $4.04 million after he paid the


capital gains tax. If he took the conservative route and the bullish market continued then he would make


about 5% per year which would give him about $2.56 million after taxes. If he decided to take the


aggressive strategy and a bear market prevailed, then he would only make about 2% per year and that


would provide him with about $1.58 million after taxes at the end of the planning horizon. If he decided


to be more conservative and the bearish market prevailed, then his investment would grow at a rate of


4% per year, which would give him $1.92 million after taxes.



As an alternative to investing in the market, Bill was considering investing in real estate. He had always


wanted to own is own hunting preserve, and the profits from his business would buy him a relatively


large tract of timberland. If he could find the right tract at the right price, then he thought that the


investment would grow at a rate of 6% per year, and would be worth $2.33 million after the taxes were




As another alternative, Bill thought about buying some rental property. He had dabbled in rental


property in the past and he knows that business fairly well. He feels good about his ability to keep it


rented and maintain it. If he went this route, his investment would grow at 5% per year and would be


worth $2.13 million at the end of the 10 years, as well.


Bill is very anxious over this decision. After teaching 34 years as a high school teacher his net-worth is


roughly $1.8 million. So this is a relatively big decision for him. What should he do?.keep his business


or sell it to his competitor?



Review Questions to consider:


1. Develop a decision tree and the payoffs using the information given. Your tree and payoffs


should fit on one page. Using Bill?s event probabilities, determine what he should do, keep his


business or sell it, if he uses the expected value approach.


2. Bill?s competitor will have to borrow the money to purchase the facility so his lender will have to


perform an appraisal which will take a couple of months. That gives Bill some time to do more


research. Do you think it should matter whether Bill?s competitor is bluffing about building


another facility if Bill does not sell to him? If it does matter, what is the most Bill should be


willing to pay for such information?


3. If Bill uses the expected value approach, do you think it would make a difference in Bill?s


decision-making process if he knew whether or not the federal government will make military


cuts? If it does matter, what is the most Bill should be willing to pay for such information?


Review Format Deliverables:


1. Provide a short executive summary referencing the trees that you created. Briefly discuss the


decision that you recommend in Problem 1, and your recommendations in Problem 2 and 3.


This summary should be no more than 1 page.


2. Provide a separate decision tree for problems 1, 2 and 3. Fit each tree on a single page. At the


very minimum, only 4 pages; the summary, and a page for each the 3 trees.


3. Present the trees using an electronic format. You can use power-point or excel. Most of what I


have done in the lectures was done using power-point. Also, I believe there is a tool that comes


with the text that has some decision analysis functions, so you might want to explore those


tools. However, if you don?t see yourself using decision analysis very much in the future, then it



might be more than you want to tackle right now. In any event, please consolidate this


assignment into one file.




Paper#9209003 | Written in 27-Jul-2016

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