Bratt's Bed and Breakfast, in a small historic New England town, must decide how to subdivide (remodel) the large old home that will become an inn. There are three alternatives:
Option A would modernize all baths and combine rooms, leaving the inn with four suites, each suitable for two to four adults. The probability of high demand would be 50%, with a gross pay out of $90,000. Under low demand the payout is $30,000. The cost that needs to be considered in this option is $50,000.
Option B would modernize only the second floor; the results would be six suites, four for two to four adults, and two for two adults only. The probability of high demand is 40%, with a payout of $80,000. Under low demand, the payout is $15,750. To modernize the second floor, the cost would be $35,000.
Option C (the status quo option) leaves all walls intact. In this case, there are eight rooms available, but only two are suitable for four adults, and four rooms will not have private baths. The probability of high demand is 30%, with a payout of $25,500. Under low demand the fixed cost is $7,800. The cost for this option is $2,000 to cover normal expenses.
Required:
a. What is the EMV for option A?
b. What is the EMV for option B?
c. What is the EMV for option C?
d. Which option should Bratt's Bed and Breakfast choose?