A city is in the running for a major sports franchise, with a 30% chance (officials think) of being selected. They will not know for 1 year. A road not far from the stadium cite is in need of repair following flooding from ruptured water pipelines. The road was in need of upgrades anyway, and will need improvement more urgently if the franchise is awarded. Benefits accrue for 20 years beginning one year from incurring the cost of improvements. The horizon value is 0. The real discount rate is 0.035. The cost of a minor upgrade is $10M and benefits are $4M/year if the franchise has not been awarded. If and after the franchise is awarded, the cost is $15M (more traffic disruption) and benefits are $8M/year. The cost of a major upgrade is $20M and benefits are $6M/year if the franchise has not yet been awarded. If and after the franchise is awarded, the cost is $30M (more traffic disruption) and benefits are $10M/year. The city could implement minimum necessary repairs for $5M now and delay deciding on improvements. Benefits are $0/year. (This restores the status quo level of service.) The city could undertake the minor improvement now and the major improvement later. a) Set up the extensive form. b) Find the solution with the highest ENPV. c) What are the best and worst case scenarios for the option with the highest ENPV? d) What is the value of perfect information on whether the franchise will be awarded? A city is in the running for a major sports franchise, with a 30% chance (officials think) of being selected. They will not know for 1 year. A road not far from the stadium cite is in need of repair following flooding from ruptured water pipelines. The road was in need of upgrades anyway, and will need improvement more urgently if the franchise is awarded. Benefits accrue for 20 years beginning one year from incurring the cost of improvements. The horizon value is 0. The real discount rate is 0.035. The cost of a minor upgrade is $10M and benefits are $4M/year if the franchise has not been awarded. If and after the franchise is awarded, the cost is $15M (more traffic disruption) and benefits are $8M/year. The cost of a major upgrade is $20M and benefits are $6M/year if the franchise has not yet been awarded. If and after the franchise is awarded, the cost is $30M (more traffic disruption) and benefits are $10M/year. The city could implement minimum necessary repairs for $5M now and delay deciding on improvements. Benefits are $0/year. (This restores the status quo level of service.) The city could undertake the minor improvement now and the major improvement later. a) Set up the extensive form. b) Find the solution with the highest ENPV. c) What are the best and worst case scenarios for the option with the highest ENPV? d) What is the value of perfect information on whether the franchise will be awarded
