1. Background:

a.What is an industrial power transformer?

b. What is the expected lifetime of this type of equipment?

c.What are PCBs? What are the dangers of these chemicals?

d.Are PCB transformers still in operation?

e.Is fire or explosion a real risk for such a transformer?

2. Purchasing cost of an asset vs. expenses: Here we consider the question of the cost of replacing the transformer.

a. Example: Your company has a truck (purchase cost = 60,000). Given the conditions of use, the technical life of this equipment is 6 years. What is the cost of using this equipment for 2 years?

b. Example 2: Your company has a truck, which can still be used for 2 years, after which it will have to be replaced by a new truck. The cost of purchasing a new truck is 60,000, and its estimated lifetime is 6 years. What would be the extra cost of replacing the truck immediately (compared to the "normal" replacement at the end of the truck's normal period of use)?

c. Application to the Transformer Case: In the case of the AMEP transformer, what working assumption(s) can you make for the extra cost of the immediate replacement of the transformer?

3. Conduct a decision tree analysis of this problem. Indicate the recommended solution based on the tree analysis.

4. Explore the sensitivity of the decision to the data: The above problem presentation shows that risk studies yield variable estimates. At least another important part of the problem is also uncertain. Is the recommendation suggested by the tree evaluation likely to be different if these less-known elements have slightly different values?

5. Is the solution suggested by the tree analysis in question 3 identical to the alternative that you would recommend to the company? Explain your reasons.

6. Present in a concise managerial report your analysis and your recommendation to AMEPs Board. The report should have the following structure a. Cover page indicating the names of all the members of the analysis team. b.Executive summary: from the problem to the recommendations, in a few lines. A busy reader should be able to quickly read this summary, get the essence of the problem and of your solution, and know if he should read the report or not. This part comes first in the document, but you should of course write it after everything else is complete. c. The body of your report, presenting your analysis. d. Your conclusions and recommendations. e.If necessary, an appendix will present the elements that support your conclusions but are too bulky to include in the body of the document.

Oregonians' electricity needs are served by 40 utilities and a small number of power marketers 2 . Ashland Municipal Electric Utility (AMEP) is the second oldest Municipal Utility in Oregon. Power for the City of Ashland is purchased from the Bonneville Power Administration and produced at the City-owned Hydro Plant, metered at distribution substations, and dispersed through city-owned feeder and distribution lines, transformers and meters, to each customer. 3 AMEP is considering replacing some of its equipment at a generating substation and is attempting to decide whether it should replace an older, existing PCB transformer. Even though the PCB transformer meets all current regulations, if an incident occurred, such as a fire, and PCB contamination caused harm either to neighboring businesses or farms or to the environment, the company would be liable for damages. Recent court cases have shown that simply meeting utility regulations does not relieve a utility of liability if an incident causes harm to others. Also, courts have been awarding large damages to individuals and businesses harmed by hazardous incidents. If the utility replaces the PCB transformer, no PCB incidents will occur and the only cost will be the cost of the transformer, $85,000. Alternatively, if the company decides to keep the existing PCB transformer, then, as the existing risk assessment studies yield a range of slightly different risk estimates, management considers that there is a 50-50 chance of there being a high likelihood of an incident or a low likelihood of an incident. - For the case in which there is a high likelihood that an incident will occur, there is a .004 probability that a fire will occur sometime during the remaining life of the transformer and a 996 probability that no fire will occur. If a fire occurs, there is a 20 probability that it will be bad and the utility will incur a very high cost of approximately $90 million for the cleanup, whereas there is an .80 probability that the fire will be minor and cleanup can be accomplished at a low cost of approximately $8 million. If no fire occurs, then no cleanup costs will occur. - For the case in which there is a low likelihood of an incident occurring, there is a .001 probability that a fire will occur during the life of the existing transformer and a 999 probability that a fire will not occur. If a fire does occur, then the same probabilities exist for the incidence of high and low cleanup costs, as well as the same cleanup costs, as indicated for the previous case. Similarly, if no fire occurs, there is no cleanup cost