The Lake Placid Town Council has decided to build a new community center to be used for conventions, concerts, and other public events, but considerable controversy surrounds the appropriate size. Man

The Lake Placid Town Council has decided to build a new community center to be used for conventions, concerts, and other public events, but considerable controversy surrounds the appropriate size. Many influential citizens want a large center that would be a showcase for the area, but the mayor feels that if demand does not support such a center, the community will lose a large amount of money. To provide structure for the decision process, the council narrowed the building alternatives to three sizes: small, medium, and large. Everybody agreed that the critical factor in choosing the best size is the number of people who will want to use the new facility. A regional planning consultant provided demand estimates under three scenarios: worst case, base case, and best case. The worst-case scenario corresponds to a situation in which tourism drops significantly; the base-case scenario corresponds to a situation in which Lake Placid continues to attract visitors at current levels; and the best-case scenario corresponds to a significant increase in tourism. The consultant has provided probability assessments of .10, .60, and .30 for the worst-case, base-case, and best-case scenarios, respectively.

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The town council suggested using net cash flow over a five-year planning horizon as the criterion for deciding on the best size. A consultant developed the following projections of net cash flow (in thousands of dollars) for a five-year planning horizon. All costs, including the consultant’s fee, are included.

Demand ScenarioCenter SizeWorst CaseBase CaseBest CaseSmall400500660Medium-250650800Large-400580990

A. Show the expected net cash flow (in thousands of dollars) for each decision alternative (to the nearest whole number).

Small CenterMedium CenterLarge Center

What is your recommended decision?  (enter 1, 2, 3, 4, or 5)

  1. Small center
  2. Medium center
  3. Larger center
  4. Either the small or medium center
  5. Either the medium or larger center

B. What is the expected value of perfect information (in thousands of dollars)? 

Do you think it would be worth trying to obtain additional information concerning which scenario is likely to occur?  (enter 1 or 2)

  1. Yes, the value of perfect information suggests a market research study could be beneficial
  2. No, the value of perfect information shows little to be gained by further study

C. Suppose the probability of the worst-case scenario increases to 0.20, the probability of the base-case scenario decreases to 0.50, and the probability of the best-case scenario remains the same. Show the expected net cash flow (in thousands of dollars) for each decision alternative (to the nearest whole number).

Small CenterMedium CenterLarge Center

What is your recommended decision?  (enter 1, 2, 3, 4, or 5)

  1. Small center
  2. Medium center
  3. Larger center
  4. Either the small or medium center
  5. Either the medium or larger center

D. The consultant suggested that an expenditure of $150 thousand on a promotional campaign will effectively reduce the probability of the worst-case scenario to zero and increase the probability of the best-case scenario to 0.40. The probability of the base-case scenario will be 0.60. Include the cost of the promotional campaign and show the revised projections of the net cash flow (in thousands of dollars).

Base CaseBest CaseSmall CenterMedium CenterLarge Center

Using this payoff table, show the expected net cash flow (in thousands of dollars) for each decision alternative (to the nearest whole number).

Small CenterMedium CenterLarge Center

What is your recommended decision?  (enter 1, 2, 3, 4, or 5)

  1. Small center
  2. Medium center
  3. Larger center
  4. Either the small or medium center
  5. Either the medium or larger center