Question
A private Power producing Company is deciding whether or not to build a power plant at x Caldera or at y Crater. The cost of
A private Power producing Company is deciding whether or not to build a power plant at x Caldera or at y Crater. The cost of building the power plant is $10 Million at x Caldera and $20 million at y Crater. If the company builds at x Caldera , however, and an earthquake occurs at x Caldera during the next five years, the construction will be terminated and the company will lose $10M (and will still have to build a power plant at y Crater). A prior, the company believes there is a 20% chance that an earthquake will occur at x Caldera during the next five years. For around $1million, a geologist can be hired to analyze the fault structure at x Caldera. He will predict whether an earthquake will occur or will not occur. The geologist past record indicates that he will predict an earthquake on 95% of the occasions that an earthquake will occur and no earthquake on 90% of the occasions for which an earthquake will not occur. Advice the company on: a) A plausible tool (fully constructed) to use for decision making (6Mks) b) The most attractive alternative location to chose. (4Mks) c) Should they hire the geologist? If yes, what is the maximum pay should they offer him. d) What is the VOII e) What is the VOPI This
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