6. The lease of Theme Park, Inc., is about to expire. Management must decide whe
ID: 3419854 • Letter: 6
Question
6. The lease of Theme Park, Inc., is about to expire. Management must decide whether to renew the lease for another 10 years or to relocate near the site of a proposed motel. The town planning board is currently debating the merits of granting approval to the motel. A consultant has estimated the net present value of Theme Park's two alternatives under each state of nature as shown on the following page. • Supplement to Chapter Five Decision Theory 233 What course of action would you recommend using? a. Maximax. b. Maximin. c. Laplace. d·. Minimax regret. Motel Motel Options Approved Rejected Renew s 500,000 $4,000,00 Relocate 5,000,000 100,00
Explanation / Answer
The lease of Theme Park, Inc., is about to expire. Management must decide whether to renew the lease for another 10 years or to relocate near the site of a proposed motel. The town planning board is currently debating the merits of granting approval to the motel. A consultant has estimated the net present value of Theme Park's two alternatives under each state of nature
We Calculate the regret table.
Alternative Motel Approved Motel rejected
Renew 500,000 4000,000
Relocate 0 3,900,000
Maximax =Relocate – net present value (payoff) of $5,000,000
Maximin (best of all the worst alternatives)
Renew – net present value (payoff) = $500,000
Laplace (best of the expected payoffs for all alternatives
Relocate – net present value (payoff)= $2,550,000
Minimax regret (least of all the maximum regrets for each alternative
Relocate – net present value (regret)= $3,900,000
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