Question
The city of Kingston has decided to build a new large venue event centre (LVEC) for conventions, concerts, and other public events, but considerable controversy
The city of Kingston has decided to build a new large venue event centre (LVEC) for conventions, concerts, and other public events, but considerable controversy surrounds the appropriate size. Many influential citizens want a large center that would be a showcase for the area, but the mayor feels that if demand does not support such a center, the community will lose a large amount of money. To provide structure for the decision process, the council narrowed the building alternatives to three sizes: small, medium, and large. Everybody agreed that the critical factor in choosing the best size is the number of people who will want to use the new facility. A regional planning consultant provided demand estimates under three scenarios: worst case, base case, and best case. The worst-case scenario corresponds to a situation in which tourism drops significantly; the base-case scenario corresponds to a situation in which Kingston continues to attract visitors at current levels; and the best-case scenario corresponds to a significant increase in tourism. The consultant has provided probability assessments of .39, .41, and .2 for the worst-case, base-case, and best-case scenarios, respectively.
The city council suggested using net cash flow over a five-year planning horizon as the criterion for deciding on the best size. A consultant developed the following projections of net cash flow (in millions of dollars) for a five-year planning horizon. All costs are included.
Demand Scenario | |||
Center Size | Worst Case | Base Case | Best Case |
Small | 3 | 4 | 5 |
Medium | 1 | 5 | 8 |
Large | -6 | 1 | 13 |
What is the expected value with perfect information? (At least 2 decimal places)
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