ou are the owner of a popular cinema in downtown New York that needs refurbishment.

You could decide against refurbishment and let the cinema become increasingly

dilapidated. In this case, there would be a payoff of $0.

Alternatively, you can invest in a major refurbishment that will cost you $1,000,000. You

expect the major refurbishment to lead to increased visitor numbers. You have employed

a consultant who estimates that undertaking the major refurbishment could yield returns

(payoffs) between $600,000 and $3,000,000. The assigned probabilities to these payoffs

Are:

• A 70% chance for returns of $600,000;
• A 30% chance for returns of $3,000,000.

You could also opt for a minor refurbishment due to budget constraints. The minor

refurbishment could cost approximately $400,000. Naturally, the payoffs for the minor

refurbishment will be lower, and are estimated to have:

• A 30% chance to be as high as $1,500,000;
• A 40% chance of being $400,000; or
• A 30% chance of being as low as $150,000.

What will your decision be? To help you decide, clearly indicate the following on a drawn

decision tree:

• The root nodes
• The decision nodes, chance nodes, and branches
• The terminal nodes
• The expected payoff of each decision
• The EMV of the decision