Assignment:
Q: 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 below. Suppose that the management of Theme Park, Inc., has decided that there is a 0.32 probability that the motel's application will be approved.
| Options |
Motel
Approved |
Motel
Rejected |
| Renew |
$600,000 |
$5,000,000 |
| Relocate |
4,000,000 |
200,000 |
a-1. If management uses maximum expected monetary value as the decision criterion, calculate expected monetary value for the alternatives "Renew" and "Relocate"? (Omit the "tiny_mce_markerquot; sign in your response.)
a-2. Which alternative should it choose?
Renew
Relocate
b. 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.