A mid-sized chain restaurant is considering growing their business and opening additional restaurants in new markets....

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Accounting

A mid-sized chain restaurant is considering growing theirbusiness and opening additional restaurants in new markets. One ofthe key factors in making this decision will be the level ofinterest rates over the next few years. It is estimated that thereis a 30% chance that interest rates will go down by 2 percentagepoints, a 60% chance that they will stay the same, and a 10% chancethat they will go up by 2 percentage points. The expansion optionsthat they are considering and possible payoffs are shown in thetable below.
Which alternative is best, based on expectedvalue?
Rates down Rates Rates up
2 percent unchanged 2 percent
Open 20 restaurants ?$200,000 $90,000.00 $150,000
Open 10 restaurants ?$115,000 $40,000.00 $80,000.00
Do nothing -$70,000.00 $0.00 $5,000.00

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3.9 Ratings (606 Votes)

As given in the question the restaurant is considering growing of their business and oe of the key factor to take this decision about expansion is level of interest over next few years so the possible payoffs for posible interest rates changes needs to be considered for deciding which alternative is See Answer

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	Rates down	Rates	Rates up
	2 percent	unchanged	2 percent
Open 20 restaurants	?$200,000	$90,000.00	$150,000
Open 10 restaurants	?$115,000	$40,000.00	$80,000.00
Do nothing	-$70,000.00	$0.00	$5,000.00