Question

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. 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. 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
a) What decision should Lake Placid make using the expected value approach?
b) Construct risk profiles for the medium and large alternatives. Given the mayor's concern over the possibility of losing money and the result of part (a), which alternative would you recommend?
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?

Answer 1

your correct answer would be b