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1. X is a health club, currently has 6000 members, with each member paying a subscription fee of $720k pa. X is considering whether or not to expand its exercise studio in a hope to improve its membership numbers.
Opt1: No expansion. Membership no. would be expected to fall to 5250 pa for the next 3 years. Operational cost stays at $80 per member pa.
Opt2: Capital cost to expand: $360k.
Expect on membership no. for the next 3 year:
40% – remain at current level of 6000 pa
60% – Increase to 6500 pa
Expect on operational cost for the next 3 year:
50% – Increase to $120 pa
50% – Increase to $180 pa
Calculate the maximum price that X should pay for perfect information about the expansion’s exact effect on Membership Numbers.Please do not simply set me a question and expect an answer!!
This is a past exam question and so you already have an answer. You should use this forum to ask about things in the answer that you do not understand.Have you watched my free lectures on decision making under uncertainty, because I explain how to calculate the value of perfect information in detail? You cannot expect me to type out the whole lecture here 🙂
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