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    Decision Tree Analysis: Emergency Power Generator

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    Q-7a. The management of a bank in the Caribbean was concerned about the potential loss that might occur in the event of a hurricane. The bank estimated that the loss from one of these storms could be as much as $100 million including losses 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 storm 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 5% probability that the resulting losses will be very large or approximately $80 million in lost earnings. Alternatively, it is estimated that there is a 95% probability of only slight losses of around $1 million. Using decision tree analysis, determined whether the bank should install the new power generator.

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    Solution Summary

    The solution provides step by step method for a decision tree analysis for the installation of an emergency power generator.