Question

A company has to transport a container by road from Amsterdam (Holland) to Tabriz

(Iran), a distance of 4,529km. There are two viable routes. Route A is longer but less

dangerous than Route B. If the container reaches its destination, the company will receive

a fee of €30,000. Total overhead costs incurred will amount to €12,000 on Route A and

€9,000 on Route B. The probability that the container is hijacked on Route A is estimated

to be 20% and the probability that the container is hijacked on Route B is estimated to be

0.5. If the container is hijacked, the company will receive no fee but anticipates it will only

have to pay two-thirds of the total overhead costs. The company will not be insuring the

container because of the prohibitive cost of cargo insurance for such a journey.

(i) Calculate the expected monetary value for each route and use these to advise the

company which route it should take.

(ii) There are reports of armed incursions across a border at a critical point of Route

A. As a result, the probability of the container being hijacked on Route A is revised

to 45%. Explain what effect, if any, this has on the advice you gave in your answer

to (i).

Answer 1

l