Decision Analysis Example

# Decision Analysis Example - then the power plant barge...

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1 Decision Analysis Example Real-world Power-Plant Barge Investment Decision

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2 The Problem An investor owns a barge that has an old oil-fired power plant on it. It is currently in Miami, but it can no longer be used there because of the air quality regulations (it pollutes a lot). The investor has to decide what to do. She could scrap it for \$200,000 in Florida. She could have it towed to Grenada for a cost of \$100,000 where it could be used earning \$50,000 per year for the next 10 years after which it would be scrapped for \$25,000. There is a 10% chance that the power-plant barge would sink enroute to Granada and all value would be lost. She could also have it towed to the Philippines for a cost of \$250,000. If the Philippines government passes a new pollution regulation (25% chance), then the power-plant barge would earn \$40,000 per year for 10 years. If the new regulation is not passed,

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Unformatted text preview: then the power plant barge would earn \$100,000 for ten years. At the end of the ten years, the power-plant barge would be scrapped for \$25,000. There is a 20% chance of losing the power-plant barge enroute. • The investor uses a 12% discount rate for all decisions of this type. 3 NPV Calculation Year Grenada Phillipines 1 Phillipines 2 \$0 \$0 \$0 1 \$50 \$40 \$100 2 \$50 \$40 \$100 3 \$50 \$40 \$100 4 \$50 \$40 \$100 5 \$50 \$40 \$100 6 \$50 \$40 \$100 7 \$50 \$40 \$100 8 \$50 \$40 \$100 9 \$50 \$40 \$100 10 \$25 \$35 \$75 NPV \$274.46 \$224.40 \$556.97 12% 4 Three Decisions • Scrap now • Grenada • Philippines Scrap Grenada Philippines Uncertainties • Scrap: None • Grenada: Lost at sea • Philippines: Lost at sea and Regulation Scrap Grenada Philippines .1 .9 .20 .80 Lost Not Lost Not 200.00 274.46 224.40 .25 .75 New Reg Old Reg 556.97...
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## This note was uploaded on 09/20/2010 for the course SDS 88223 taught by Professor Fischbeck during the Spring '10 term at Carnegie Mellon.

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Decision Analysis Example - then the power plant barge...

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