Jan finished culinary school and wants to start her own pastry business. She has few options, and believes that a sensitivity analysis would help her to make the best business decision. She is considering three options, and is confident that there is a strong demand (.6) because there is only one other bakery in the town.
Building in the newer area of town where has been recent growth, Strong demand payoff $7 million, weak demand payoff $2 million.
Renovating in the historic district where there is a lot of tourism and foot traffic. Strong demand payoff $12 million, weak demand $7 million. Using three decisions, complete the equations and label each component of the equation. Use page 114 and 115 as a model, as well as the equation below to get you started. In addition, I construct a decision table to go with the equations (see page 110). In five to seven sentences, explain what decision you believe Jan should make.
EV (d1) = 0.6 (7) + .4(2) = ______
EV(d2) = 0.6 ( ) + .4 ( ) = _______
EV(d3) = 0.6 (12) + .4( ) = _______
Where EV(d1) = Decision 1: building in new side of town
Where EV(d2) = Decision 2: rent an existing bakery
Where EV(d3) = Decision 3: renovate in historic district