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    Probabilistic Risk Analysis

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    Problem 1
    The optimistic, most likely, and pessimistic estimates for a given project are shown in the table below.
    Optimistic Most Likely Pessimistic
    Capital Investment $90,000 $100,000 $120,000
    Useful Life 12 years 10 years 6 years
    Market Value $30,000 $20,000 $0
    Net Annual Cash Flow $35,000 $30,000 $20,000
    MARR (per year) 10% 10% 10%

    (a) What is the Annual Worth (AW) of each of the three cases (optimistic, most likely, pessimistic)?
    (b) The most critical factors are useful life and net annual cash flow. Complete the table below showing the AW for all combinations of these two factors.
    (Please refer attached file for table).

    Problem 2
    Complete the table below and select the best alternative for levee improvement to protect the town in the event of a flood. Assume a 30-year life on the problem, the levee project will be financed with bonds that will pay 5% interest, and that the annual worth of the average property damage from a flood that exceeds the levee will cost $100,000,000.
    (Please refer attached file for table).

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    https://brainmass.com/economics/break-even-analysis/probabilistic-risk-analysis-603615

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    Solution Summary

    Solution to first problem depicts the steps to estimate the Annual Worth in different cases. Solution to second problem calculates the expected loss for different levee improvement levels and selects the optimum improvement level.

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