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 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.
The Lake Placid Town Council decided to build a new community center to be used for conventions, concerts, and other public
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.
| Demand Scenario | |||
| Center Size | Worst-Case | Base-Case | Best-Case |
| Small | 400 | 500 | 660 |
| Medium | -250 | 650 | 800 |
| Large | -400 | 580 | 990 |
- 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. What effect, if any, would these changes have on the decision recommendation?
It will have an effect
change to small - The consultant has suggested that an expenditure of $150,000 on a promotional campaign over the planning horizon will effectively reduce the probability of the worst-case scenario to zero. If the campaign can be expected to also increase the probability of the best-case scenario to 0.4, is it a good investment? Enter your answers in thousands of dollars.
If the promotional campaign is conducted, a large center size would be selected. This would give anexpected value of $ fill in the blank 10 thousands. This is a $ fill in the blank 11 thousands decrease over the answer in part (a).
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