Best scenario for the bank using a decision tree analysis

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Reference no: EM1385978

The management of Cecilia First Bank was concerned about the potential loss that might occur in the even of a physical catastrophe such as a power failure or fire. The bank estimated the loss from one of these incidents could be as much as $100 million including the losses due to interrupted service and cusotmer relations. The cost of the generator is $800,000 and if it is installed, no losses from any incidents will be incurred. However, if it is not installed, there is 10% chance that a power outage will occur during the next year. If there is an outage, there is a .05 probability that the resulting losses will be very large, approximately $ 80 million in lost earnings. Also, it is estimated that there is a .95 probability of only slight losses of around $ 1 million. What is the best scenario for the bank, as when using a decision tree analysis, whether the bank should buy a new generator or not?

Reference no: EM1385978

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