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a. What decision should Lake Placid make using the expected value approach? Medium or Large b. Identify the risk profiles for the medium and large alternatives. e Probability 0.6 0.4 0.2 -400 0 400 800 Net Cash Flow

a. What decision should Lake Placid make using the expected value approach? Medium or Large b. Identify the risk profiles for the medium and large alternatives. e Probability 0.6 0.4 0.2 -400 0 400 800 Net Cash Flow

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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< Problem 4-15 The Lake Placid Town Council 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 cente 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 substantially; 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 substantial 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 5-year planning horizon as the criterion for deciding on the best size. The following projections of net cash flow (in thousands of dollars) for a 5-year planning horizon have been developed. All costs, including the consultant's fee, have been included. Center Size Worst-Case Base-Case Best-Case Small 400 500 660 Medium -250 650 Large -400 580 Medium or Large a. What decision should Lake Placid make using the expected value approach? (1) Probability b. Identify the risk profiles for the medium and large alternatives. 0.6 Demand Scenario 0.4 0.2 0.6 800 990 -400 0 400 Net Cash Flow 800 Previous Next >
Transcribed Image Text:< Problem 4-15 The Lake Placid Town Council 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 cente 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 substantially; 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 substantial 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 5-year planning horizon as the criterion for deciding on the best size. The following projections of net cash flow (in thousands of dollars) for a 5-year planning horizon have been developed. All costs, including the consultant's fee, have been included. Center Size Worst-Case Base-Case Best-Case Small 400 500 660 Medium -250 650 Large -400 580 Medium or Large a. What decision should Lake Placid make using the expected value approach? (1) Probability b. Identify the risk profiles for the medium and large alternatives. 0.6 Demand Scenario 0.4 0.2 0.6 800 990 -400 0 400 Net Cash Flow 800 Previous Next >
(ii) (iii) Probability Probability Small 0.6 0.4 0.2 0.6 0.4 0.2 -400 -400 EVPI $ 122,000 0 Net Cash Flow 400 800 Risk profile for medium-size community center: Risk profile for large-size community center: Given the mayor's concern over the possibility of losing money and the result of part (a), which alternative would you recommend? 0 400 800 Net Cash Flow c. Compute the expected value of perfect information. Do you think it would be worth trying to obtain additional information concerning which scenario is likely to occur? Previous Next
Transcribed Image Text:(ii) (iii) Probability Probability Small 0.6 0.4 0.2 0.6 0.4 0.2 -400 -400 EVPI $ 122,000 0 Net Cash Flow 400 800 Risk profile for medium-size community center: Risk profile for large-size community center: Given the mayor's concern over the possibility of losing money and the result of part (a), which alternative would you recommend? 0 400 800 Net Cash Flow c. Compute the expected value of perfect information. Do you think it would be worth trying to obtain additional information concerning which scenario is likely to occur? Previous Next
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