Purchase Solution

# Decision Tree Case Analysis

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Mountain States Electric Service is an electrical utility company serving several states in the Rocky Mountain Region. It is conisdering replacing some of its equipment at a generating substation and is attempting to decide whether it should replace an older, existing PCB transformer. PCB is a toxic chemical known formally as polychlorinated biphenyl. Even though the PCB generator meets all current regulations, if an incident occured, such as a fire, and PCB contamination caused harm either to neighboring businesses or farms or the environment, the company would be liable for damages. Recent court cases have shown that simply meeting utility regulations does not relieve the utility of liability if an incident causes harm to others. Also, courts have been awarding large damages to individuals and businesses harmed by hazardous incidents.
If the utility replaces the PCB transformer, no PCB incidents will occur, and the only cost will be the cost of the transformer, \$85,000. Alternatively, if the company decides to keep the existing PCB transformer, then management estimates that there is a 50% chance of there being a high likelihood of an incident or a low liklihood of an incident. For the case in which there is a high liklihood that an incident will occur, there is a .004 probability that a fire will occur sometime during the remaining life of the transformer and a .996 probability that no fire will occur. If a fire occurs, there is a .20 probability that it will be bad and the utility will incur a high cost of approx. \$90 million for the clean up where as there is an .80 probability that the fire will be mately \$8 million. If no fire occurs, no clean up costs will occur. For the case in which there is a low liklihood of an incident occuring, there is a .001 probability that a fire will occur during the life of the existing transformer and a .999 probability that a fire will not occur. If a fire occurs, there is a .20 probability that it will be bad and the utility will incur a high cost of approx. \$90 million for the clean up where as there is an .80 probability that the fire will be mately \$8 million.
Perform a decision tree analysis of this problem for Mountain States Electric Service and explain which solution should be recommended.

##### Solution Summary

Perform a decision tree analysis of this problem for Mountain States Electric Service and explain which solution should be recommended.

##### Solution Preview

The first step is to draw the decision tree that encapsulates all the possible actions. The company has an option to either replace or not replace. That will be the first decision. If they decide to replace a cost is associated with it: \$85000. That is given in the first cell on second level in the graph. If they do not replace they face an expected cost. There are two possibilities: high likelihood of fire or low likelihood of fire, ...

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