Mike Flynn, the Midwestern region site-selection supervisor for the Barnes and Noble bookstore chain is considering renting space in two locations to open B&N bookstores. One location has 20,000 square feet and the other location has 12,000 square feet.
In the larger square area location, there is a 70% probability to make $320,000 a year profit on the store and a 30% probability of making only $50,000 a year profit. For this store, there is $239,000 a year total expected value for it.
In the smaller square area store, there is a 70% probability to make $240,000 a year profit on the store and a 30% probability of making $130,000 a year profit. For this store, there is a $207,000 a year total expected value for it.
At 70% probability, if Mike rents the smaller area store and then decides either to expand it by 4,000 square feet, the expected value will rise to $235,000 a year total expected value for it.
At 70% probability, if Mike rents the smaller area store and then decides either to expand it by 8,000 square feet, the expected value will rise to $263,000 a year total expected value for it.
At 70% probability, if Mike chooses no square feet expansion the total expected value for the smaller area store will remain at $207,000 a year.
See the decision tree below for reference.
Out of the decisions provided, which one is the most correct, best option?
Group of answer choices
By choosing to rent the 12,000 square foot store and then expanding it by 8000 sq. ft., Mike can virtually match the expected value of the 20,000 sq. ft. store.
By choosing to rent the 12,000 square foot store and then expanding it by 8000 sq. ft., Mike can virtually match the expected value of the 20,000 sq. ft. store.
Mike can get the best-expected value by simply renting the 20,000 sq. ft store.
By choosing to rent the 12,000 square foot store and then expanding it by 4000 sq. ft., Mike can virtually match the expected value of the 20,000 sq. ft. store.