The Lake Placid Town Council has decided to build a new community center to be used for conventions and other events, but considerable controversy surrounds the appopriate 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: worst case, base case, and best case. The worst case scenario corresponds to a situation in which tourism drops significantly: the base case scenario correseponds to a situation in which Lake Placid continues to attract visitors at current levels: and the best case scenario correspondes to a signficant increase in tourism. The consultant has provided probability assessments of .10, .60, and .30 for the worst case, base case, and best case scenarios, respectively. The town council suggested using net cash flow over a five year planning horizon as the criterion for deciding on the best size. A consultant developed the following projections of net cash flow (in thousands of dollars) for a five year planning horizon. All costs including the consultant’s fee are included.Center Size Worst case Base case Best CaseSmall 400 500 660Medium -250 650 800Large -400 580 990a. What decision should Lake Placid make using the expected value approach?b. Compute the expected value of perfect information. Do you think it would be worth trying to obtain additional information concerning which scenario is likely to occur?c. Suppose the probability of the worst case scenario increases to .2 the probability of the base case scenario decreases to .5 and the probability of the best case scenario remains at .3. What effect, if any, would these changes have on the decision recommendation?d. The consultant suggested that an expenditure of $150,000 on a promotional campaign over the planning horizon will effectively reduce the probability of the worst case scenario to zero. If the campaign can be expected to also increase the probability of the best case scenario to .4 is it a good investment?

Question

The Lake Placid Town Council has decided to build a new community center to be used for conventions and other events, but considerable controversy surrounds the appopriate 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: worst case, base case, and best case. The worst case scenario corresponds to a situation in which tourism drops significantly: the base case scenario correseponds to a situation in which Lake Placid continues to attract visitors at current levels: and the best case scenario correspondes to a signficant increase in tourism. The consultant has provided probability assessments of .10, .60, and .30 for the worst case, base case, and best case scenarios, respectively. The town council suggested using net cash flow over a five year planning horizon as the criterion for deciding on the best size. A consultant developed the following projections of net cash flow (in thousands of dollars) for a five year planning horizon. All costs including the consultant’s fee are included.


Center Size Worst case Base case Best Case
Small 400 500 660
Medium -250 650 800
Large -400 580 990


a. What decision should Lake Placid make using the expected value approach?
b. Compute the expected value of perfect information. Do you think it would be worth trying to obtain additional information concerning which scenario is likely to occur?
c. Suppose the probability of the worst case scenario increases to .2 the probability of the base case scenario decreases to .5 and the probability of the best case scenario remains at .3. What effect, if any, would these changes have on the decision recommendation?
d. The consultant suggested that an expenditure of $150,000 on a promotional campaign over the planning horizon will effectively reduce the probability of the worst case scenario to zero. If the campaign can be expected to also increase the probability of the best case scenario to .4 is it a good investment?

Expert Answer

Want to see the step-by-step answer?

Check out a sample Q&A here.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.
Tagged in
Business
Finance

Related Finance Q&A

Find answers to questions asked by students like you.

Q: Explain how a firm that never files for bankruptcy can still suffer from indirect bankruptcy costs. ...

A: Indirect Bankruptcy Costs:Those costs which occur on a firm and pressurized the firm to file the ban...

Q: Executives at Microsoft are interested to get into the drone delivery business. Since it would take ...

A: (a) Calculation of present values of two options:Answer:Net present values of both options are $40 m...

Q: Automobiles had an average cost of $16,000 in 2013. Average cost of the same automobiles now is $20,...

A: Calculation of rate of increase for the automobiles between 2 time period: Rate of increase for the ...

Q: Assess the estimation techniques of long term corporate investment in your answer focus on the relat...

A: Stock valuation is one of the method used to determine the theoretical value or intrinsic value of t...

Q: Even though most corporate bonds in the United States make coupon payments semiannually, bonds issue...

A: Calculation of Current Price of Bond:The current price of bond is €884.56.Excel Spreadsheet:

Q: Questions are on image

A: (1)Computation of closing stock and cost of goods sold is as follows:Calculation:Therefore, the valu...

Q: Consider the following table: Stock Fund Bond Fund Rate of Rate of Scenario Probability Return Retur...

A: b.Calculation of expected return and variance for stock funds:The expected return and variance for s...

Q: 9. A passbook savings account has a rate of 6%. Find the effective annual yie if the interest is com...

A: I am solving the first question, that is Q - 9.

Q: This year (10 years after you first took out the loan), you check your loan balance. Only part of yo...

A: Hi, there is some additional data missing the question. The total mortgage amount, interest rate, pr...

Q: I am struggling with this problem as well and how to approach setting it up in excel. I'm using the ...

A: Initial Investment of New Product = Decrease in Firm’s FCFs of Current Year = $36 MillionCash Flow o...

Q: A mining company in South Africa has discovered a new gold vein in a mountain 150 kilometers north o...

A: 1) To set up a new a mine in a mountain which is 150 kms north of Johannesburg, the company would sp...

Q: What annual rate of return is earned on a $5,000 investment when it grows to $9,000 in five years? (...

A: We need to use the concept of time value of money to solve the question. According to the concept of...

Q: A certain investment will require an immediate cash outflow of $4m. At the end of each ofthe next 4 ...

A: PART A & B:Calculation of Net Present Value:The real interest rate of 5% in Part B is calculated...

Q: You decide to discount a$5250, 345-day note at 3% to your bank at a discount rate of 4.5% on day 210...

A: Calculation of Proceeds:Assuming there are 360 days in a year.The proceeds are $5,309.80.Excel Sprea...

Q: What would my total be earning 5% compounded monthly for 12 years after that (without any additional...

A: Future value can be defined as the future worth of specified present amount at a future date at give...

Q: Consider an asset that costs $665,000 and is depreciated straight-line to zero over its nine-year ta...

A: Calculation of after cash flow from sale of asset:The after-cash flow from sale of asset is $170,296...

Q: How much money will you have in 2 years if you deposited $5500 into an account 4 years ago earning s...

A: Calculate the future value as follows:

Q: Why are credits and debits different for banks compared for personal finance usage?

A: In personal account, all expenses, assets, and losses will be debited. All incomes, liabilities, and...

Q: McConnell Corporation has bonds on the market with 15.5 years to maturity, a YTM of 6.2 percent, a p...

A: Coupon rate:The coupon rate is the rate of yield provided by the fixed-income securities and it is t...

Q: During times of rising​ inflation, are investments with fixed returns like a bond or bank CD attract...

A: Inflation is the time in the economy when consumer prices of goods and services are high enough and ...

Q: Which do factors and insurance companies have in common?   Both are primary participants in money ...

A: The correct answer is the third option i.e. 3) Both allow extending credit to customers without putt...

Q: Camber Corporation has to decide if they can finance purchasing 10 new machines for all their manufa...

A: The actual cost of each machine is $1,730,000 and total cost to be required to purchase 10 machines ...

Q: How do I calculate the variance of the portfolio as shown in the image?

A: Calculating Variance is simple, but one needs to follow the certain steps to reach the answer. First...

Q: H M 9Ro-a s re raa troese db ato a6411 6alo 5a,1908ecrcase 6. Lonnie needs extra money to buy a truc...

A: Calculate the interest amount as follows:

Q: Maurer, Inc., has an odd dividend policy. The company has just paid a dividend of $6 per share and h...

A: Calculation of Price of Share today:The price of share today is $65.75.Excel Spreadsheet:

Q: The Brandon household has monthly income of %5,630 on which to base their budget. They plan to save ...

A: Monthly budget is calculated on the base income of $5,630According to the information provided.Month...

Q: The option to develop follow-on projects, expand markets, expand or retool plants, and so on that wo...

A: The correct answer is “Growth Option”.

Q: Based on current dividend yields and expected capital gains, the expected rates or return on portfol...

A: Capital asset pricing model can be used to study the how systematic risk on a particular asset is li...

Q: Rob Thomas Traders opened an account to short-sell 1,000 shares of WeWork at $60. The initial margin...

A: When the money borrowed from the broker for making an investment is made then it is called margin tr...

Q: Question 1 Atlantic Corporation is the largest logging company in the north eastern part of the Unit...

A: The value of the stock is the trading price of the stock at which the stock is purchased in the mark...

Q: Calculate the price of a 5.6 percent coupon bond with 10 years left to maturity and a market interes...

A: Face Value of Bond = $1,000Coupon Rate = 5.6%Type of coupon payment = SemiannualNumber of Coupon pay...

Q: A stock with a beta of 1.5 has an expected rate of return of 20%. If the market return this year tur...

A: Calculation of rate of return on stock:Rate of return on the stock is 3.5%.The market return is 11% ...

Q: One-year Treasury bills currently earn 2.90 percent. You expect that one year from now, 1-year Treas...

A: Calculate the current rate on 3-year treasury securities as follows:

Q: There will likely be a difference between your calculation of the Company’s intrinsic value and its ...

A: Intrinsic value is the true or inherent value of a company. It is a fundamental value which is deriv...

Q: The coupon rate and the face value of the bond is contained in the   Group of answer choices bond i...

A: Bond indenture is the legal agreement between bond issuer and bond holder which consists of all term...

Q: Which of the following is the best explanation of what the call premium is?   Group of answer choice...

A: Call premium refers to the amount over (above) the par value of a share or bond which is payable to ...

Q: Chrome Co. borrows $1,665,000 at an interest rate of 7.32% APR monthly with equal monthly payments o...

A: PV of loan = $ 1,665,000; Annuity payment, A = 15,265;Period = 1 monthinterest rate per period, r = ...

Q: I am struggling with this problem as well. I'm using the Pearson Corporate Finance book 4th edition ...

A: Part (a)We will use the excel function NPV to calculate the NPV at a discount rate of 18%. Please se...

Q: If you invest $900 in a bank in which it will earn 8 percent compounded quarterly, how much will it ...

A: PV = $ 900; r = 8% compounded quarterly; m = frequency of compounding = 4 (as there are four quarter...

Q: Given the indicated maturities listed in the following table, assume the following yields for U.S. T...

A: Shown below is the yield curve for the given interest rates:

Q: Consider the following income statement for the Heir Jordan Corporation:    HEIR JORDAN CORPOR...

A: The income statement of Heir Jordan corporation provides the following information:

Q: Consider the following data for a one-factor economy. All portfolios are assumed to be well diversif...

A: Before we get into the question, it's imperative to note that beta of a portfolio comprising of two ...

Q: As of the October 2016 SEC rule changes, which money market fund will have a floating net asset valu...

A: Money Market Funds are instruments that invest in high quality short-term debt instruments. Several ...

Q: Please show all equations and work as needed. Make the correct answer clear. If possible, please typ...

A: Note: Calculations are typed for your convenience as requestedNet amount of debt issue is the amount...

Q: You were hired as a consultant to XYZ Company, whose target capital structure is  30% debt, 8% prefe...

A: target capital structure:Proportion of debt = Wd = 30%Proportion of preferred capital = Ws = 8% andP...

Q: how to assess the estimation techniques of long-term corporate investments, by focusing  on the rela...

A: Stock Valuation techniques are mostly driven by the concept that valuation of a stock today is nothi...

Q: You have borrowed $45,000 on margin to buy shares in Tencent, which is now selling at $120 per share...

A: a.Calculation of Current Margin:The current margin is 42.86%.Excel Spreadsheet:

Q: A yield curve is a graphical representation of the relationship between the yields and the maturitie...

A: The yield curve displays the upward path- this yield curve is termed as normal yield curve.The rates...

Q: How many years (and months) will it take $2 million to grow to $4.40 million with an annual interest...

A: Calculation of NPER:Answer:Number of years (and months) it will takes is 10 years and 2 months.Excel...

Q: all methods used to optimize portfolio (FINANCE) from Modern portfolio theory (MPT)?

A: An investment is always evaluated on the basis of return and risks it offers. “Risk” and “return” ar...