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. Everbody 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: worst case, base case, and best case. the
worst-case scenario corresponds to a 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 the best-case scenario corresponds to a
significant increase in tourism. The consultant has provided
probability assessments of 0.10, 0.60, and 0.30 for the worst-case,
bsae-case, and best-case scenarios.
The town council suggested using net cash flow over a five year
planning horizon as the criterion for deciding on the best size.
The following projetions of net cash flow (in thousnads of dollars)
for a five-year planning horizon have been developed. All costs,
including the consultant’s fee, have been included.
Small- worst= 400, base= 500, and best= 660
medium- worst= -250, base- 650, and best= 800
large- worst= -400, base= 580, and best= 990.
a) what decision should Lake Placid make using the expected
b) construct risk profiles for the medium and large
alternatives. given the mayors concern over the possibility of
losing money and the result of part (a), which alternative would
c) compute the expected value of perfect information.
Please show the work- she posted how to do this in a video and I
have no understanding. I need to learn!