Review Final

# Review Final - Example Review Exam 3 The management of...

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Review Exam # 3 Example The management of first American Bank was concerned about the potential loss that might occur in the event of a physical catastrophe such as power failure. The bank estimates that the loss may be \$100 million. The bank is considering the installation of an emergency power generator that costs \$800,000. However, if it is not installed there is a chance of 10% of power outage. If there is an outage there is a 0.05 probability that the resulting losses will be large, approximately \$80 million. It is estimated that there is a 0.95 probability of only slight losses of \$ 1 million. Using decision tree analysis, determine if the bank should install the power generator. Decision Tree Not Install Install power outage No power outage \$800,000 0.1 0.9 large loss slight loss 0.05 0.95 \$0 \$80,000,000 \$1,000,000 ?= 80,000,000*0.05+1,000,000*0.95=4,950,000 \$4,950,000 ?= 4,950,000*0.1+0*0.9=495,000 \$495,000 Decision: Since the installation Cost (\$800,000) is greater than the expected value of not installing (\$495,000) Î do not install the Power generator ± Figure 12.5 ± Maximax: optimistic ± Maximin: pessimistic Problem 8 Chapter 12 5000 6000 6000 Theater 6000 8000 2000 Restaurant 20000 15000 -8000 Motel Surplus Stable Shortage Inv.

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Review Final - Example Review Exam 3 The management of...

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