Scissors is a hair salon. John is an owner of Scissors salon. Presently the salon has 500
Question:
Scissors" is a hair salon. John is an owner of Scissors" salon. Presently the salon has 500 regular
clients. Each client spends on average 1,000 PLN per year in the salon. Scissors" salon offers different
services like hair cutting, dyeing, permanent wave, extensions, keratin treatment, etc.
John is planing to open a new salon. The new salon would be located in the same district as Scissors"
salon. This district is a place where many new apartments are built. The district is becoming more alive.
Many yuppies start living there. Because of that John expects that there would be opened new
restaurants, cafes and many other venues. We can also expect that new fitness clubs, dance schools
and gyms would appear in this district. John predicts that new shops and services would be set up
soon. He analysed financial position of Scissors", its surrounding and market and decided to open a
new salon - Scissors 2".
Before taking steps to open a new salon John looked closely at figures and possible changes he can
introduce. He listed two alternative directions of changes taking into consideration next two 2 years.
Direction 1
John does not open a new salon. He is still the owner of Scissors". He predicts that the number of
clients raises to 600 persons in the first year and it remains the same in the second year. Each client
would spend 1,000 PLN per year in the salon.
Direction 2
Thanks to start running a new salon John can expect that the number of clients grows to 960(*) persons
with 60% probability or 1.050(*) clients with 40% probability. At the same time John has to consider that
Scissors 2" would be a new salon and prices of services would have to be lower than presently. John
estimates that with 70% probability each client would spend on average 920 PLN per year and with
30% probability each client would spend on average 950 PLN per year. The capital cost of new
investment is estimated on 600.000 PLN.
Required
1.
Calculate the expected value of two alternative activities
(6 marks)
2.
Choose the best of two directions considered by John
(7 marks)
3.
Discuss advantages and disadvantages of using expected value as a coefficient in
decision making process
(7 marks)
Financial Management for Public Health and Not for Profit Organizations
ISBN: 978-0132805667
4th edition
Authors: Steven A. Finkler, Thad Calabrese