A new minor league baseball team is coming to town and the owners have decided to build a new stadium, either small or large. The success of the team with regard to ticket sales will be either high or low with probabilities of 0.75 and 0.25, respectively. If demand for tickets is high, the large stadium would provide a payoff of approximately $20 million. If ticket sales are low, the loss on the large stadium would be $5 million. If a small stadium is constructed, and ticket sales are low, the payoff is $500,000 after deducting the cost of construction. If ticket sales are high, the team can choose to build an upper deck, or to maintain the existing facility. Expanding the stadium in this scenario has a payoff of $10 million, whereas maintaining the same number of seats has a payoff of only $3 million. a. Draw a decision tree for this problem. b. What should management do to achieve the highest expected payoff?

A builder has located a piece of property that she would like to buy and eventually build on. The land is currently zoned for four homes per acre, but she is planning to request new zoning. What she builds depends on approval of zoning requests and your analysis of this problem to advise her. With her input and your help, the decision process has been reduced to the following costs, alternatives, and probabilities:   Cost of land: $3 million. Probability of rezoning: 0.50. If the land is rezoned, there will be additional costs for new roads, lighting, and so on, of $1 million.       If the land is rezoned, the contractor must decide whether to build a shopping center or 1,400 apartments that the tentative plan shows would be possible. If she builds a shopping center, there is a 50 percent chance that she can sell the shopping center to a large department store chain for $6 million over her construction cost, which excludes the land; and there is a 50 percent chance that she can sell it…

The owner of the Party City Toronto Company must decide among building a mega centre store, building 5 new stores, or leasing 10 of their locations to another company. The profit that will result from each alternative will be determined by whether material costs remain stable, increase moderately, or increase significantly. In the payoff table below the estimated profits/losses are given in $thousands. Material Costs Stable Mega Centre Decision New Stores Leasing Determine the best decision using the Maximax decision criterion. 2130 Moderate Increase 1850 840 530 1050 940 O Decision: Mega Centre based on 2470 = max(2470,1850,1040) O Decision: Mega Centre based on 2130 = max(2130,1850,1040) Decision: Stable based on 2130 = max(2130,1050,1040) O Decision: Leasing based on 2820 = max(190,2750,2820) Significant Increase -2470 -150 1040

The XYZ manufacturing company is considering replacing one of its metal cutting machine which can be sold today for $3,000. If they kept this machine for 4 more years, its salvage value will be zero. The challenger costs $18,000, and its life is 4 years. The estimated salvage value of the challenger at the end of four years is $6,000. Should the XYZ company replace the old machine? Use the opportunity cost approach with rate of return of 10%. Assume operating costs per year for defender equals $2,000 and a saving in operating costs per year of 75% for challenger.