Rising the probability of best case scenario

Reference no: EM1313859

Q1) Lake Placid Town Council has determined to construct a new community center to be utilized for conventions, concerts, and other public events. But, significant controversy surrounds suitable size. Many influential citizens wish a large center which would be showcase for area. But mayor feels that if demand doesn't support such a center, the community will lose the large amount of money. To give structure for decision process, council narrowed building alternatives to 3 sizes: small, medium, and large. Everybody agreed that critical factor in choosing best size is number of people who will wish to use new facility. Regional planning consultant gave demand evaluates under 3 scenarios: worst case, base case, and best case. Worst-case situation corresponds to situation in which tourism drops considerably; base-case scenario corresponds to situation in which Lake Placid continues to attract visitors at present levels; and best-case scenario corresponds to significant increase in tourism. Consultant has given probability assessments of 0.10, 0.60, and 0.30 for worst-case, base-case, and best-case scenarios, respectively.

Town council proposed using net cash flow over 5-year planning horizon as criterion for deciding on best size. Following projections of net cash flow, in thousands of dollars, for 5-year planning horizon have been developed. All costs, including consultant's fee, have been included.

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

Consultant proposed that the expenditure of $150,000 on promotional campaign over planning horizon will effectively decrease probability of worst case situation to zero. If campaign can be expected to also to rise the probability of best case scenario to 0.4, is it a good investment.

Reference no: EM1313859

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