An electric utility company is trying to decide whether to replace its PCB transformer in a generating station with a new and safer transformer. To evaluate this decision, the utility needs information about the likelihood of an incident, such as a fire, a cost of such an incident and the cost of replacing a unit. Suppose the total cost of replacement, as a present value, is $75,000. If the transformer is replaced, there is virtually no chance of a fire. However, if current transformer is retained, the probability of a fire is assessed to be 0.0025. If a fire occurs, then the clean-up cost could be high ($80 million) or low ($20 million). The probability of a high clean-up cost, given that a fire occurs, is assessed to be 0.2.

• • If the company uses the expected monetary value as its decision criterion, should it replace the transformer?
  • Perform sensitivity analysis on the key parameters of the problem that are difficult to assess, namely, the probability of a fire, the probability of a high clean-up cost and the high and low clean-up costs. Does the optimal decision from part a) remain optimal for a "wide" range of these parameters?