The Lake Placid Town Council decided to build a new community
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. 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: worstcase, basecase, and bestcase. The worstcase scenario corresponds to a situation in which tourism drops substantially; the basecase scenario corresponds to a situation in which Lake Placid continues to attract visitors at current levels; and the bestcase scenario corresponds to a substantial increase in tourism. The consultant has provided probability assessments of 0.10, 0.60, and 0.30 for the worstcase, basecase, and bestcase scenarios, respectively.
The town council suggested using net cash flow over a 5year planning horizon as the criterion for deciding on the best size. The following projections of net cash flow (in thousands of dollars) for a 5year planning horizon have been developed. All costs, including the consultant's fee, have been included.

Demand Scenario 

Center Size 
WorstCase 
BaseCase 
BestCase 
Small 
400 
500 
660 
Medium 
250 
650 
800 
Large 
400 
580 
990 
 What decision should Lake Placid make using the expected value approach?
Medium or Large  Identify the risk profiles for the medium and large alternatives.


(iii) 

(iii) 
Risk profile for mediumsize community center: Is it G1 G2 or G3
Risk profile for largesize community center: Is it G1 G2 or G3
 Given the mayor's concern over the possibility of losing money and the result of part (a), which alternative would you recommend?
 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?
Best decision: Yes or No  Suppose the probability of the worstcase scenario increases to 0.2, the probability of the basecase scenario decreases to 0.5, and the probability of the bestcase scenario remains at 0.3. What effect, if any, would these changes have on the decision recommendation?
Medium or Large  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 worstcase scenario to zero. If the campaign can be expected to also increase the probability of the bestcase scenario to 0.4, is it a good investment?
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Rating:
5/
Solution: The Lake Placid Town Council decided to build a new community