Expansion Decisions for Cafe Aroma

Instructions

Week $6$ Project: Navigating Expansion Decisions for Cafe Aroma $($CO$3$ & CO$4)$ We are back with Cafe Aroma and it even more of a popular local coffee shop with a loyal customer base in its hometown, Elmville. Due to its success, the management is considering expanding to other towns. They have identified three potential locations: MapleTown, PineCity, and OakVille.

The Dilemma:

Each location comes with its own set of challenges, costs, and potential revenue. MapleTown has a bustling student population, PineCity is a business hub, and OakVille is a growing suburban community. The management needs to decide whether to expand $($and if so$,$ where$)$ or continue focusing on their single, successful location.

Provided Data:

MapleTown:

$$ Initial Investment: $$80,000$

$$ Expected Annual Revenue:

$$ High $($Probability $0\mathrm{.}4)$: $$150,000$

$$ Medium $($Probability $0\mathrm{.}5)$: $$100,000$

$$ Low $($Probability $0\mathrm{.}1)$: $$40,000$

PineCity:

$$ Initial Investment: $$100,000$

$$ Expected Annual Revenue:

$$ High $($Probability $0\mathrm{.}3)$: $$180,000$

$$ Medium $($Probability $0\mathrm{.}6)$: $$110,000$

$$ Low $($Probability $0\mathrm{.}1)$: $$50,000$

OakVille:

$$ Initial Investment: $$70,000$

$$ Expected Annual Revenue:

$$ High $($Probability $0\mathrm{.}5)$: $$130,000$

$$ Medium $($Probability $0\mathrm{.}4)$: $$90,000$

$$ Low $($Probability $0\mathrm{.}1)$: $$30,000$

Your Task:

Decision Analysis:

$$ Use the principles of decision analysis to evaluate each expansion option. Consider the initial investment, expected revenues, and associated probabilities.

EMV and Decision Trees:

$$ Construct a decision tree for the expansion decision using Excel and, if available, the PrecisionTree Add$-$In$.$

$$ Calculate the Expected Monetary Value $($EMV$)$ for each decision alternative.

Risk Aversion Considerations:

$$ Based on the management's risk appetite $($you can define this or provide multiple scenarios$),$ provide recommendations. Should 'Cafe Aroma' expand? If so$,$ which town offers the most strategic advantage?

Reflection:

$$ Discuss the challenges faced during this decision$-$making process. How did the tools from this week's module aid in your analysis? Would the decision change significantly if the management was highly risk$-$averse or risk$-$seeking?