6 The lease of Theme Park Inc is about to expire Management

6. The lease of Theme Park, Inc., is about to expire. Management must decide whether to renew the lease for another 10 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 shown on the following page. • Supplement to Chapter Five Decision Theory 233 What course of action would you recommend using? a. Maximax. b. Maximin. c. Laplace. d·. Minimax regret. Motel Motel Options Approved Rejected Renew s 500,000 $4,000,00 Relocate 5,000,000 100,00 7. Refer to Problem 6. Suppose that the management of Theme Park, Inc., has decided that there is a .35 probability that the motel\'s application will be approved. a. If management uses maximum expected monetary value as the decision criterion, which alternative should it choose? b. Represent this problem in the form of a decision tree. c. If management has been offered the option of a temporary lease while the town planning board considers the motel\'s application, would you advise management to sign the lease? The lease will cost $24,000

Solution

I have posted the answer to the first complete problems with four sub-parts. Please post one more problem to get the remaining answers. Thanks

Before recommending any action, first we need to calculate the regret table

Maximax will be equal to the relocate - net present value which is equal to $5,000,000

Maximin will be equal to the renew - present value which is equal to $500,000

Laplace will be equal to net present value of relocation $2,550,000

Minimax will be equal Relocate net present value will be equal to $3,900,000