E-Education is a new start-up organization that develops and markets MBA courses that are offered over the Internet. The company is currently located in Aurora and employs 150 people. Due to the strong growth, the company needs additional office space at this moment. There are three options that the company can consider and select one of them:
Option 1: Move the entire operation to a small Midwest town immediately.
Option 2: Lease a new building elsewhere in Aurora immediately.
Option 3: Lease a new space at its current building in Aurora for the next two years. After that, the company will consider either moving to the small Midwest town or leasing a new building elsewhere in Aurora.
The following are the additional facts and assumptions that the company needs to consider before making the final decision:
Moving the entire operation to a Midwest town would cost $1 million. Leasing space would run only $500,000 per year.
Moving to a new building in Aurora would cost $200,000. Leasing the new building’s space would cost $650,000 per year.
Leasing the new space at the current building in Aurora for the next two years would cost $750,000 per year.
The company has a 75% chance of survival after the next two years wherever it is located. If not, the company is out of business after the next two years. Note that you don’t need to consider whether the company will still survive or not after six months, one year, or any other period. You just stick to this assumption.
If the company survives after the next two years, whatever which above option will be chosen, the company will stick to the plan of the chosen option for three more years before the company constructs its own building.
Assume all other costs and revenues are the same no matter where the company is located.
Complete the following tasks:
(1) Construct a decision tree to capture the above scenario.
Note that your tree should include the following considerations if any.
Use the negative sign (-) for the cost, the expenses, cash outflow, etc.
Use the positive sign (+) for the revenue, profit, cash inflow, etc.
Your tree will be able to generate the Cumulative Chart that includes the curves of all the possible Decision Strategies.
(2) Write down the number of Decision Strategies that you can find from your tree.
(3) Write down the expected cost for each Decision Strategy.
(5) Explain which optimal decision strategy should be chosen based upon the results from (3)