Scissors" is a hair salon. John is an owner of Scissors" salon. Presently the salon has 500 regular 

clients. Each client spends on average 1,000 PLN per year in the salon. Scissors" salon offers different

services like hair cutting, dyeing, permanent wave, extensions, keratin treatment, etc.

John is planing to open a new salon. The new salon would be located in the same district as Scissors"

salon. This district is a place where many new apartments are built. The district is becoming more alive.

Many yuppies start living there. Because of that John expects that there would be opened new

restaurants, cafes and many other venues. We can also expect that new fitness clubs, dance schools

and gyms would appear in this district. John predicts that new shops and services would be set up

soon. He analysed financial position of Scissors", its surrounding and market and decided to open a

new salon - Scissors 2".

Before taking steps to open a new salon John looked closely at figures and possible changes he can

introduce. He listed two alternative directions of changes taking into consideration next two 2 years.

Direction 1

John does not open a new salon. He is still the owner of Scissors". He predicts that the number of

clients raises to 600 persons in the first year and it remains the same in the second year. Each client

would spend 1,000 PLN per year in the salon.

Direction 2

Thanks to start running a new salon John can expect that the number of clients grows to 960(*) persons

with 60% probability or 1.050(*) clients with 40% probability. At the same time John has to consider that

Scissors 2" would be a new salon and prices of services would have to be lower than presently. John

estimates that with 70% probability each client would spend on average 920 PLN per year and with

30% probability each client would spend on average 950 PLN per year. The capital cost of new

investment is estimated on 600.000 PLN.

Required

1.

Calculate the expected value of two alternative activities

(6 marks)

2.

Choose the best of two directions considered by John

(7 marks)

3.

Discuss advantages and disadvantages of using expected value as a coefficient in

decision making process

(7 marks)