Question

1.The management of First American Bank was concerned about the potential loss that might occur in the event of a physical catastrophe such as a power failure or a fire. The losses are due to interrupted service and customer relations. One project the bank is considering is the installation of an emergency power generator at its operations headquarters. The cost of the emergency generator is $800,000, and if it is installed, no losses from this type of incident will be incurred. However, if the generator is not installed, there is a 0.1 chance that a power outage will occur during the next year. If there is an outage, there is a 0.05 probability that the resulting losses will be very large, or approximately $80 million in lost earnings. Alternatively, it is estimated that there is a 0.95 probability of only slight losses of around $1 million. We need to use decision analysis to decide the best course of action.

What are your decision alternatives?

Select one:

a. Whether the damage is expected to be big or small

b. Whether to buy or not the generator

c. How much market share we can lose after a power failure

d. Whether or not the will be a power failure

I only need the answer Dont bother giving the full steps to the exercise

Answer 1

Correct option is b : Whether to buy or not the generator

Cost of the emergency generator is = $800,000.

Expected value =  0.1 * (0.05 * $80 million + 0.95 * $1 million)

0.1 x 4.95 million

= 0.495 or 495,000

Cost of the emergency generator is greater value or amount expected value or estimate value for not installing generator.

Whether to buy or not the generator, Dont buy the power generator.

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