The Lake Placid Town Council has decided to build up a new community center to be employed for conventions, concerts, and other public events. But, considerable controversy surrounds proper size. Many influential citizens want the large center that would be the showcase for area. But the mayor feels that if demand doesn't support such a center,the community will lose the large amount of money. To provide structure for decision process, the council narrowed the building alternatives to three sizes: small, medium, and large. Everybody agreed that critical factor in selecting the best size is the number of people who will want to employ the new facility. A regional planning consultant provided demand approximates under three scenarios: worst case, base case, and best case. The worst-case scenario corresponds to the situation in which tourism drops significantly; the base-case scenario corresponds to a situation in which Lake Placid continues to attract visitors at current levels; and best-case scenario corresponds to a significant rise in tourism. The consultant has provided probability assessments of 0.10, 0.60, and 0.30 for worst-case, base-case, and best-case scenarios, respectively.
The town council suggested using net cash flow over five-year planning horizon as the criterion for deciding on the best size. The following projections of net cash flow, in thousands of dollars, for the five-year planning horizon have been developed. All costs, comprising the consultant's fee, have been included.
|
|
Worst Case
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Base Case
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Best Case
|
|
Small
|
400
|
500
|
660
|
|
Medium
|
-250
|
650
|
800
|
|
Large
|
- 400
|
580
|
990
|
The consultant suggested that the expenditure of $150,000 on promotional campaign over the planning horizon will effectively minimize the probability of worst case scenario to zero. If the campaign can be expected to also to raise the probability of best case scenario to 0.4, is it a good investment.