Hartsfield International Airport in Atlanta, Georgia, is one of the busiest airports in the world. Plans are being made to build another airport outside the city limits. Two possible locations for the new airport have been identified, but a final decision will not be made for a year. The Magnolia Inns hotel chain intends to build a new facility near the new airport once its site is determined. Land values around both possible sites for the new airport are increasing as investors speculate that property values will increase greatly in the vicinity of the new airport. There are four decision alternatives for the hotel chain: 1) Buy the parcel of land at location A.
2) Buy the parcel of land at location B.
3) Buy both parcels.
4) Buy nothing.
The possible states are:.
1) The new airport is built at location A.
2) The new airport is built at location B.
Use the following information for decision analysis through a decision tree and answer questions a, b and c.
Magnolia Inns
Parcel of Land Near Location
А B
Current purchase price $18 $12
Present value of future cash
flows if hotel and airport are
built at this location $31 $23
Present value of future sales
price of parcel if the airport is
not built at this location $6 $4
Note that a land parcel can be sold after purchase. For example, if the parcel of land at location A was purchased at $18mln and the airport was built near Location B, the purchased Land at location A can be sold for $6mln.
A) What will be the decision if Maximax criteria is used?
B) What will be the decision if Maximin criteria is used?
C) Considering the following probabilities, use the expected monetary value criteria to determine the decision.
Probability of the airport being built at Location A = 0.4.
Probability of the airport being built at Location B = 0.6.