You 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

1.1. Include your decision tree here: