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 altematives 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 Base Case Worst Best 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(Smal) EV(Medium) EV(Large) The best decision is to build a -Select- community center. (b) Compute the expected value of perfect information. EVPI = Do you think it would be worth trying to obtain additional information concerning which scenario is likely to occur? O The town should consider additional information about the likelihood of the three scenarios. O The town should not consider additional information about the likelihood of the three scenarios. (c) Suppose the probability of the worst-case scenario increases to 0.2, the probability of the base-case scenario decreases to 0.5, and the probability of the best-case scenario remains at 0.3. EV(Smal) EV(Medium) EV(Large) What effect, if any, would these changes have on the decision recommendation? The best decision is to build a -Select- community center. (d) The consultant suggested that an exxpenditure of $150,000 on a promotional campaign over the planning horizon will effectively reduce the probability of the worst-case scenario to zero. The campaign can be expected to also increase the probability of the best-case scenario to 0.4. (Remember to subtract the cost of the promotional campaign from the expected value.) EV(Small) EV(Medium) EV(Large) The best decision is to build a --Select-- community center. Compared to the analysis in part (c), is this a good investment? O t is not a good investment as the risk of loss is eliminated. O It is a good investment as the risk of loss is not eliminated. O It is not a good investment as the risk of loss is not eliminated. O It is a good investment as the risk of loss is eliminated.