Unit 4 Assignment: Expected Payoff Table
Outcomes addressed in this activity:
Assess risk trade-offs in order maximize results.
Defend recommendations based on data analysis.
Evaluate the effect of accepting specific recommendations.
IT528-4: Recommend proactive measures to address ethical pitfalls to risk analytics activities.
The purpose of this Assignment is to practice creating and interpreting an expected payoff table, which will help a hotel determine how many of its rooms to offer at a discount, and how many to offer at full price. By forecasting the expected revenue at different levels, you can help the hotel maximize its revenue by minimizing its discount rate while maximizing its occupancy rate.
Scenario: You have been approached by a hotel owner who would like you to forecast expected payoffs for him. The hotel has 100 rooms, and they would like to maximize their revenue by selling as many as possible at full price, and selling the rest to travel brokers, such as Travelocity and Expedia, at a discounted price. The market rate for hotel rooms in their area is $279 per night. They feel that they can sell rooms for as little as $229 per night and still profit. Selling rooms for less than that would cause a financial loss. Every room left empty for a night reduces revenue, so they would rather discount some rooms than have them empty, but their preference is to sell as many rooms as they can at full price. Your task is to help the hotel owner find the best possible combination of full and discounted rooms in order to maximize hotel revenue. You will do this in Excel. Download the Expected Payoff Table.xlsx file from Course Documents. Tables for Expected Payoff and Opportunity Loss have been prepared for your use in that file.
Complete the following steps:
Fill in the Pricing Assumptions Table with the correct values from the scenario above.
Create formulas in the Expected Payoff Table to calculate the amount of revenue the hotel owner will expect to earn for each combination of full and discounted rooms. Ensure that you never calculate a revenue amount that would represent more than the sale of 100 hotel rooms, as he only has 100 rooms to sell each night. Use a color to highlight the cell in each column that represents the maximum amount of revenue for each combination of full price and discounted rooms.
Using the Likelihood percentages (row 8 in the spreadsheet), create formulas to calculate the Expected Payoff Calculations. Use a color to highlight the best expected payoff.
Calculate the Price of Perfect Information. This is the difference between the revenue generated by selling all rooms at full price (there is only a 2% likelihood of that), and the best expected payoff calculated in step 3 above.
Create formulas to complete the Opportunity Loss table. Opportunity loss is the difference between the best possible revenue and the actual revenue at each combination of full price and discounted rooms. Use a color to highlight the best (smallest) opportunity loss for each combination of full and discounted rooms.
Using the Likelihood percentages (row 8 in the spreadsheet), create formulas to calculate the Expected Opportunity Loss calculations. Use a color to highlight the best (smallest) expected opportunity loss.
In the conclusion area (cells R8 through U37 are merged for this), write an explanation of how your Expected Payoff Table will help the hotel owner. Identify one positive and one negative potential ethical issue the hotel owner will face in using this payoff table.
For this Assignment, you are not required to cite sources or format according to APA style. Your only submission will be the completed Excel spreadsheet. If you use sources in your written conclusion, you should cite them. Be sure that you have saved the spreadsheet with all of your formulas, color coding, and written explanation before uploading it to the Unit 4 Assignment dropbox.
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