Acadia Logistics anticipates that it will need more distribution center space to accommodate what it believes will be a significant increase in demand for its final-mile services. Acadia could either lease public warehouse space to cover all levels of demand or construct its own distribution center to meet a specified level of demand, and then use public warehousing to cover the rest. The yearly cost of building and operating its own facility, including the amortized cost of construction, is $13 per square foot. The yearly cost of leasing public warehouse space is $22.50 per square foot

Requirements (in sq. ft)   300,000   500,000   700,000   900,000

Probability 0.45 0.25 0.15 0.15

ANSWER:

a. The expected value of leasing public warehouse space as required by demand is $ ?

b. Calculate the expected value of building a 250,000-square-foot distribution center and leasing public warehouse space as required if demand exceeds the need for 250,000 square feet of space.

c. Calculate the expected value of building a 375,000-square-foot distribution center and leasing public warehouse space as required if demand exceeds the need for 375,000 square feet of space.

d. Calculate the expected value of building a 500,000-square-foot distribution center and leasing public warehouse space as required if demand exceeds the need for 500,000 square feet of space.

e. Calculate the expected value of building a 625,000-square-foot distribution.

f. Which of the above decisions provides the minimized expected value?