MC Question 7
A leisure company owns a number of large health and fitness resorts, but one is suffering from declining sales and is predicted to make a loss in the next year. As a result management have identified a number of possible actions:
(1) Shut down the resort and sell off the assets
(2) Undertake a major upgrade to facilities costing $4·5m
(3) Undertake a minor upgrade to facilities costing $2m
The upgrades are predicted to have variable results and the probability of good results after a major upgrade is 0·8, whereas the probability of good results after a minor upgrade is 0·7.
The company is risk neutral and has prepared the following decision tree.
Which decision should the company make?
A. Shutdown and sell
B. Undertake the major upgrade
C. Undertake the minor upgrade
D. Undertake the major upgrade if results are good