3.1. Pine Mountain Resort

In the spring of 1971, Monte Upshaw, the head of a syndicate of investors interested in developing recreation property, was trying to decide about the development of the Pine Mountain Ski area. The site, located in the northwestern corner of the state, was an ideal location for a ski area.

The question now seemed to be how to best develop the area. Two major alternatives were under consideration:

1. Go ahead now with a full-scale development. This would involve building access roads, and substantial investment in skiing facilities.

2. Begin with a small-scale development. This would involve access roads into only a part of the area, and a smaller-scale ski development. This could be expanded after 1 year if demand seemed to warrant it.

Because the syndicate members believed in moving from one project to another, they had agreed to sell at the end of the second year of operation. Therefore, the operating time horizon was limited to 2 years.

Upshaw recognized that the degree of success would depend upon the trends in skiing. Tàere was also some question about the population growth in the northern part of the state. Would this growth continue at the past rate or drop off (or perhaps accelerate)?

As can be seen from the discussion above, there was considerable uncertainty about the extent of the use of the facility if it were built.

The major economic considerations involved the costs of constructing the roads and facilities, and the revenue that would accrue from the facilities (less operating costs).

Although estimates of usage of the facility had been made, the actual usage rate was quite uncertain. Rather than try to come up with one number estimate, Upshaw decided upon three general levels of usage—high, medium, and los. Costs, revenues, and sales prices were calculated for each level. The results are shown in Table 3.4. Trends in population, skiing popularity, and competing facilities were taken into account in making the estimates in Table 3.4.

the usage level achieved in year 2 would not necessarily be the same as in year 1. Upshaw felt that if usage in year l is high, then year 2 usage could be either medfum or high. If year 1 usage is medium, the second year could be either the same or high or lot. If the first year has low utilization, year 2 could be lois or medium.

Upshaw recognized that the expenditures involved a substantial financial commitment for his syndicate and was concemed about the risk involved. At the minimum he wanted a good way to display all the decisions and possible outcomes.

table 3.4 ( costs, revenue, and sales prices)

A. construction costs ( roads and facilities)

1. Full development now:	$5 million
2.Small development now:	$3 million
3. Expansion after one year:	$4 million

2. Net Revenues and Sales Prices

1. Full-Size Facility (originally full size or expanded. Expansion can be com- pleted in the off season so that full-size facility revenue will be realized beginning in year 2 if expansion is undertaken at the end of year 1).

usage	revenue cost operation cost each year	sales price based on usage in 2 years
High	$1.0 million	$5.0 million
Medium	0.5 million	2.5 million
Low	0.1 million	0.5 million

2. Small-Scale Facility

usage	revenue cost operation cost each year	sales price based on usage in 2 years
High	$0.5 million	$2.5 million
Medium	0.4 million	2 million
Low	0.1 million	0.5 million

Draw a decision diagram representing Upshaw’s decision problem. Place the monetary consequences on each end point of the diagram. Do not try to solve the problem.

Note: please solve this problem using the Decision Tree.

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Decision Tree Upshaw is trying to decide whether to go ahead with a fullscale development or a smallscale development of the Pine Mountain Ski area If ... View the full answer