Problem 4-15 The Lake Placid Town Council decided to build a new community center to be used for conventions, concerts,
Posted: Tue Sep 07, 2021 7:50 am
Problem 4-15
The Lake Placid Town Council decided to build a new community
center to be used 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 substantially; the base-case scenario corresponds to a
situation in which Lake Placid continues to attract visitors at
current levels; and the best-case scenario corresponds to a
substantial increase in tourism. The consultant has provided
probability assessments of 0.10, 0.60, and 0.30 for the worst-case,
base-case, and best-case scenarios, respectively.
The town council suggested using net cash flow over a 5-year
planning horizon as the criterion for deciding on the best size.
The following projections of net cash flow (in thousands of
dollars) for a 5-year planning horizon have been developed. All
costs, including the consultant's fee, have been included.
The Lake Placid Town Council decided to build a new community
center to be used 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 substantially; the base-case scenario corresponds to a
situation in which Lake Placid continues to attract visitors at
current levels; and the best-case scenario corresponds to a
substantial increase in tourism. The consultant has provided
probability assessments of 0.10, 0.60, and 0.30 for the worst-case,
base-case, and best-case scenarios, respectively.
The town council suggested using net cash flow over a 5-year
planning horizon as the criterion for deciding on the best size.
The following projections of net cash flow (in thousands of
dollars) for a 5-year planning horizon have been developed. All
costs, including the consultant's fee, have been included.