Recreational Company Harvard Case Solution & Analysis


Recreational properties was found by Anders Forsgren, a civil engineer having experience of 10 years. He raised about $15 million from agroup of investors. Meanwhile, Recreational Properties mainlyfocused on the Europeanmarkets and made many deals as soon as they acquired permission from the European Union Environment Agency to create Recreational Property.

Indeed, the company had the policy to purchaseRecreational Properties and make some improvements themselves to increase the property’s potential and sell them again within one to two years. Meanwhile, the first developments includedroads, sewers, andother core facilities. Furthermore, during the same season, Anders was stuck in a very complicated situation.

Anders focused on three parcels of land having thepotential to be used for the ski resort at the White Mountain Development. Indeed, he had purchased an option inJune 2001 for $500,000 to buy that parcels of land at astrike price of $10 million at thematurity date of June 2002. However, after the purchasing of his sixth option, agroup of conservationists had filed suit to stop construction of the ski resort.

Therefore, the European Union Environment Agency refused to lease the land until court decidesabout the case filed by the conservationists. Indeed, the situation has forced Anders to bear loss of theoption purchased and the deal as well. Since it was also clear that court won’t reachadecisionany time soon, which would cause the option to expire along with the deal.

Recreational Company Harvard Case Solution & Analysis

Analysis of the situations

The current situation reveals that there are multiple decisions presented toAndersright now. If the European environment agency leases the land, then Anders would have two options, one would be to sell the property for $14 million, and second to sell land after some development within one year. However, it can be determined that if land’s reputation increased then the land can be sold for $21.6 million and in case the land losesits reputation, it can be sold for $16.3.

On the other hand, the probability that reputation of the land would increase is 75%, and it becomingpoorer would be 25%.If the European environmental agency does not lease the land then Ander would able to sell itfor $8 million. However, why would Anders exercise the option, since the strike price is $10 million and market price would be $8 million?

Furthermore, if we assume that agency grants are leased to Anders, he would have two options. Firstly, to sell theproperty without further development for $14 million and secondly, to develop the Ski resort and sell it after one year for $21.8 million. See Figure 1. Furthermore, if Anders considersselling theproperty without development, he will get aprofit of $3.5 million and if he sells it after development then it will result in a net profit of $4.925 million.

On the other side, if the company tries to get anextension of one year until June 2003, the company would have to pay extra for the option. The cost of one year option was $500,000, but if we assume that contractor would also ask for the same cost as the option, then the total spending on the option would be $1 million..................

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