Stevens and Company
13 Pages Posted: 21 Oct 2008
A real-estate broker wishes to develop a model to be used by a sophisticated buyer to analyze the financial characteristics of a large estate. This case raises several issues, including risk in long-term investments, selection of a time horizon, determination of a salvage value, and general modeling choices.
STEVENS AND COMPANY
Bob Patterson thought, “What a great idea!” He was complimenting himself on the novel way to make a real estate sale. He had been working for some time with Gordon D. Sandler, who was interested in buying the Blandfield estate, but so far he had met with little success. Sandler, president of Sandler Electronics, liked Blandfield as a place to live, but he was concerned about the value of the estate as an investment. Blandfield, with a price of $ 4.5 million, was a large, risky, long-term investment. Sandler had made investment decisions almost as large and complex as this for his business, but he normally had available a thorough analysis of the investment opportunities. Bob Patterson decided that was what he would give him.
Bob's idea was to develop a computer model that would detail the financial characteristics of the Blandfield investment. He could use the model for any party interested in the property, but an interactive model would be especially useful for Sandler because Sandler could try “what-if” sensitivity and risk analysis to his heart's content. This would be a great experiment, Patterson thought. In another month, he would be getting his own IBM personal computer, and if a computer model would help him sell large properties, then he could use financial investment models in his business on a routine basis.
Over the past 30 years, Gordon Sandler had built his father's electrical components manufacturing firm into a growing company valued at $ 5 million. He was now president and, at 55, was ready to shed some of his heavy operating responsibilities. His plan was to become chairman of the board and hire a replacement to take over as president of the company, which would allow him to reduce his time commitment to the firm. It appeared that, for at least the next 15 years, his salary, which was his only current source of income, as his company did not pay out dividends, would provide enough money for him to maintain his current lifestyle. This would make it possible for him to pursue his dream of living in semi-retirement on an estate like Blandfield.
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Keywords: decision theory, management-decision models, project finance, real-estate valuation, simulation
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