1. A real estate investor has the opportunity to purchase a small apartment complex. The apartment complex costs $4 million and is expected to generate net revenue (net after all operating and finance costs) of $60,000 per month. Of course, the revenue could vary because the opportunity race is uncertain. Considering the uncertainty, the revenue could vary from a low of -$10,000 to high of $100,000 per month. Assume that the investor’s objective is to maximize the value of the investment at the end of 10 years.
(a) Do you think the investor should buy the apartment complex or invest the $4 million in a 10-year certificate of deposit earning 9.5%? Why?
(b) The city council is currently considering an application to resolve a nearby empty parcel of land. The owner of that land wants to build a small electronic-assembly plant. The proposed plant does not really conflict with the city’s overall land use plan, but it my have a substantial long-term negative effect on the value of the nearby residential district in which the apartment complex is located. Because the city council currently is divided on the issue and will not make a decision until next month, the real estate investor is thinking about waiting until the city council makes its decision.
If the investor waits, what could happen? What are the trade offs that the investor has to make in deciding whether to wait or to purchase the complex now?
(c) Some people are habitually indecisive. They let others make decisions and then follow along whether they agree or not. Why do you think they behave this way?
Do groups make better decisions than individuals? What are the pros and cons of working in a group to make decisions? Which do you prefer and why?