A resort hotel has $20,000,000 to invest it its next location. There are three potential sites for the expansion. The cost to build the facility in any of the locations is $20,000,000. Which location should be selected? Location A:Probability / Outcome. 50 / 20%.30 / 9%.20 / - 10% Location B:Probability / Outcome. 40 / 19.32 / 7.5%.28 / - 11% Location C:Probability / Outcome. 45 / 22%.50 / 6%.05 / - 15%a) Location Ab) Location Bc) Location Cd) Any of the above

Question

Susan Gilbert

Business

15 June, 14:18

A resort hotel has $20,000,000 to invest it its next location. There are three potential sites for the expansion. The cost to build the facility in any of the locations is $20,000,000. Which location should be selected? Location A:Probability / Outcome. 50 / 20%.30 / 9%.20 / - 10% Location B:Probability / Outcome. 40 / 19.32 / 7.5%.28 / - 11% Location C:Probability / Outcome. 45 / 22%.50 / 6%.05 / - 15%a) Location Ab) Location Bc) Location Cd) Any of the above

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Answers (1)

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Mckenzie Roman · Answer 1

C) Location C

Explanation:

We have to calculate the expected monetary value (EMV). EMV is how much money you should expect to receive from different options. The EMV of the three options are:

EMV location A = (.50 x 20%) + (.30 x 9%) + (.20 x - 10%) = 10% + 2.7% - 2% = 10.7%

EMV location B = (.40 x 19%) + (.32 x 7.5%) + (.28 x - 11%) = 10% + 2.7% - 2% = 7%

EMV location C = (.45 x 22%) + (.50 x 6%) + (.05 x - 15%) = 10% + 2.7% - 2% = 12%

Since the EMV of location C is higher, then location C is the best alternative.