Question
A corporation is trying to decide whether to open a new factory outlet store. The store will have high, medium, or low demand. Before it
A corporation is trying to decide whether to open a new factory outlet store. The store will have high, medium, or low demand. Before it decides whether to open the store, the corporation can pay $6,000 immediately for a market survey. The market survey has a 0.19 probability of predicting ""high"" demand, a 0.23 probability of predicting ""medium"" demand, and a 0.58 probability of predicting ""low"" demand. If the survey predicts ""low"" demand, the corporation will NOT open the store. If the survey predicts ""high"" or ""medium"" demand, the corporation needs to determine whether or not to open the store. If the survey predicts ""high"" demand, there is a 0.56 probability the store will actually have high demand, a 0.3 probability the store will actually have medium demand, and a 0.14 probability the store will actually have low demand. If the survey predicts ""medium"" demand, there is a 0.36 probability the store will actually have high demand, a 0.28 probability the store will actually have medium demand, and a 0.36 probability the store will actually have low demand. If the corporation decides not to take the market survey, there is a 0.19 probability the store will have high demand, a 0.23 probability the store will have medium demand, and a 0.58 probability the store will have low demand. If the corporation decides to open a store, the immediate cost of opening the store is $630,000, and the store must remain open for exactly 4 years. If demand is high, the store will EARN $1.1 million for each year that the store is open. If demand is medium, the store will EARN $340,000 for each year that the store is open. If demand is low, the store will LOSE $144,000 for each year that the store is open. You should assume that demand remains the same for each year that the store is open. There is no salvage value, and you can ignore taxes. If the corporation decides not to open a store, the corporation has a net present worth = $0 minus the cost of the survey (if the corporation takes the survey). The corporation's MARR is 12%. The coopration will choose the alternative with the largest expected net present worth (NPW). What is the expected NPW of the best alternative?"
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