The management of Canuck Union Bank is concerned about the potential loss that might occur in the event of a physical catastrophe, such as a power failure or a fire. The bank estimates that the loss form one of these incidents could be as much as $100 million including losses due to interrupted service and customer relations. The bank is considering installing an emergency power generator at its operations headquarters. The cost of the emergency generator is $900,000, 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 10% chance that a power outage will occur during the next year. If there is an outage, there is a 0.04 probability that the resulting losses will be very large, or approximately $90 million in lost earning. Alternatively, it is estimated that there is a 0.96 probability of only slight losses of around $2 million. Using decision tree analysis determines whether the bank should install the new power generator. What is the expected value of this strategy?
Decision tress is a diagrammatically representation of the various alternative decisions of the company. It included arrows and various mathematical symbols. It is used in decision making by analysing all the alternative.
Answer and Explanation:
Using decision tree analysis determines whether the bank should install the new power generator.
The below shown is a decision tree. With the help of...
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fromChapter 2 / Lesson 12
Clearly identifying all possible solutions for a given decision is an important part of successful management. In this lesson, you will learn how to use a decision tree to identify and select possible courses of action.