The Willow Caf̩ is located in an open-air mall. Its lease expires this year and the restaurant owner has the option of signing a 1-, 2-, 3-, 4-, or 5-year lease. However, the owner is concerned about recent energy price increases (including the price of gasoline), which affect virtually every aspect of the restaurant operation including the price of food items and materials, delivery costs, and its own utilities. The restaurant was very profitable when energy prices were lower, and the owner believes if prices remain at approximately their current level profits will still be satisfactory; however, if prices continue to rise he believes that he might be forced to close. In these latter circumstances a longer term lease could be a financial disaster, but with a shorter term lease the mall landlord could always rent the restaurant۪s space out from under it when the lease expires. As such, the restaurant owner۪s estimates of future profits must also reflect the possibility that the lease will not be renewable. The following payoff table summarizes the owner۪s profit (and loss) estimates for each future state of nature of energy prices (over a five-year period).

Determine the best decision using expectedvalue.

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Energy Prices Same Increase 49 Lease Decision 1-year 2-year 3-year $156,000 $93000 6,000 427,000 642,000 319,000 171,000 933,000 473,000-337,000 1,228,000 16000 51,000 150,000 42,000 5-year