The lease of Theme Park, Inc. is about to expire. Management must decide whether to renew the lease for another ten years or to relocate near the site of a proposed motel. The town planning board is currently debating the merits of granting approval to the motel. A consultant has estimated the net present value of Theme Park's two alternatives under each state of nature as show. What course of action would you recommend using
- Maximax
- Maximin
- Laplace
- Minimax regret
|
Options
|
Motel Approved
|
Motel Rejected
|
|
Renew
|
$500,000
|
$4,000,00
|
|
Relocated
|
5,000,000
|
100.00
|
Suppose that the management of Theme Park, Inc., has decided that three is a .35 probability that the motel's application will be approved.
- If management uses maximum expected monetary value as the decision criterion, which alternative should it choose?
- Represent this problem in the form of a decision tree
- If management has been offered the option of a temporary lease while the town planning board considers the motel's application, would you advice management to sign the lease? The lease will cost $24,000