Extension of the Snow Fun Ski Resort Problem Suppose that the operating cost of the snowmaking equipment is actually 30% higher than the owner had estimated, that is, $13,000 if the snowfall is heavy, $65,000 if it is moderate, and $117,000 if it is light.

How will the increased operating cost affect the owner’s optimal decision? As shown above, the best decision now is to let the larger hotel run the ski resort and the profit is $45,000 Calculate the EVPI, and determine that maximum amount that could be paid for a perfect forecast. If the snowfall is more than 40”, the owner should operate the resort without a snowmaker (profit=$120,000, probability=40%). If the snowfall is between 20 to 40 inches or if it is less than 20 inches, the owner should let the larger hotel run the resort (profit=$45,000, probability=20%+40%=60%). EVPI = $120,000*0.40 + $45,000*0.60 = $75,000 Since the optimal profit without perfect information is $45,000, the maximum amount the owner can pay for perfect information is $75,000 - $45,000 = $30,000

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Decision Tree Final Problem The NC Airport Authority is trying to solve a difficult problem with the over-crowded RaleighDurham airport. There are three options to consider: A. The airport could be totally redesigned and rebuilt at a cost of $8.2 million. The present value of increased revenue from a new airport is in question. There is a 70% chance this present value would be $11 million, a 20% chance present value would be $5 million, and a 10% chance present value would be $1 million, depending on whether the airport is a success, moderate success, or a failure. B. The airport could be remodeled with a new runway for a cost of $4.7 million. The present value of increased revenue would be $6 million (80% chance) or $3 million (20% chance). C. They could do nothing with the airport and suffer a loss of revenue of either $1 million