A 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 the town 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 0.10, 0.60, and 0.30 for the worst-case, base-case, and best-case scenarios, respectively. 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 Scenario Center Size Worst Base Best Case Case Case Small 390 490 650 Medium -260 640 790 Large -410 570 980 (a) What decision should the town make using the expected value approach? EV(Small) EV(Medium) 528 595 EV(Large) 595 The best decision is to build a medium or large-sized community center. (b) Construct risk profiles for the medium and large alternatives (Submit a file with a maximum size of 1 MB.). Choose File No file chosen
A 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 the town 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 0.10, 0.60, and 0.30 for the worst-case, base-case, and best-case scenarios, respectively. 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 Scenario Center Size Worst Base Best Case Case Case Small 390 490 650 Medium -260 640 790 Large -410 570 980 (a) What decision should the town make using the expected value approach? EV(Small) EV(Medium) 528 595 EV(Large) 595 The best decision is to build a medium or large-sized community center. (b) Construct risk profiles for the medium and large alternatives (Submit a file with a maximum size of 1 MB.). Choose File No file chosen
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A 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 the town 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 0.10, 0.60, and 0.30 for the worst-case, base-case, and best-case scenarios, respectively.
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 Scenario
Center
Size
Worst Base Best
Case Case Case
Small
390
490
650
Medium
-260
640
790
Large
-410
570
980
(a) What decision should the town make using the expected value approach?
EV(Small)
EV(Medium)
528
595
EV(Large)
595
The best decision is to build a medium or large-sized
community center.
(b) Construct risk profiles for the medium and large alternatives (Submit a file with a maximum size of 1 MB.).
Choose File No file chosen
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