Question
In: Accounting
The lease of Theme Park, Inc., is about to expire. Management must decide whether to renew...
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 below. Suppose
that the management of Theme Park, Inc., has decided that there is
a 0.21 probability that the motel’s application will be
approved.
| Options | Motel Approved |
Motel Rejected |
||
| Renew | $ | 410,000 | $ | 4,025,000 |
| Relocate | 2,025,000 | 110,000 | ||
a-1.
If management uses maximum expected monetary value as the decision
criterion, calculate expected monetary value for the alternatives
"Renew" and "Relocate"? (Omit the "$" sign in your
response.)
| Alternative | Expected Value |
| Renew | $ ?? |
| Relocate | $ ?? |
a-2. Which alternative should it choose?
-
Renew lease??
-
Relocate??
c. If management has been offered the option of a
temporary lease while the town planning board considers the motel’s
application, would you advise management to sign the lease? The
lease will cost $21,000. (Omit the "$" sign in your
response.)
Yes because the cost is less than EVPI of $
??? .
Solutions
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