Reference no: EM132163459
PART A: Western Idaho Commercial Development (WICD) is considering several alternative investment options. These include building and leasing an office building, building a recreational sports center, buying and leasing a distribution center, and purchasing land for long-term future development. The financial success of these projects depends on situational changes in the city of Boise in the next five years. The various development projects and their five-year financial return (in millions of dollars) given the various economic situations are given in the table below: Situational Changes WICD Project BigCo Corporate Headquarters Moves From City City Builds Stadium Downtown Boise Airport Becomes Lufthansa Hub Convention Center Built Near Nampa Office Building 1.2 3.6 2.5 1.9 Sports Center 1.8 2.7 2.0 1.8 Distribution Center 2.5 1.9 3.5 2.0 Purchase Land 0.8 1.6 2.8 3.3
Determine the optimal decision using each of the following decision criteria.
a. Maximax
b. Maximin
c. Equal likelihood
d. Hurwicz (? = 0.6)
• If WICD senior management uses the Hurwicz criterion to make their decision in this instance, explain what this might suggest about their decision making strategy
e. Minimax Regret
PART B: WICD hired an analyst to assign a probability to the likelihood that each situational change will occur over the next five years. Note that each change precludes the possibility that any other event will occur (that’s more than a touch contrived, but my imagination is running a little short with this one). The analyst has determined that there is a 0.10 probability that BigCo will move its corporate headquarters, a 0.35 probability that the city will build a new stadium, a 0.30 probability that Lufthansa will use Boise airport as an international hub, and a 0.25 probability that a new convention center will be built near Nampa.
f. Determine the best project using expected value (expected monetary value).
g. Determine the expected value given perfect information.
h. Determine the expected value of perfect information.
Now that you've "run the numbers", you are in an excellent position to make a recommendation.
i. Based on the results that you've calculated for Parts A and B, what project would you recommend to WICD management? Explain your reasoning.