Flood-proofing of the building

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Decision making

A factory building is located in an area subject to occasional flooding by a nearby river. You have been brought in as a consultant to determine whether flood-proofing of the building is economically justified. The alternatives are as follows:

(a) Do nothing. Damage in a moderate flood is $10,000 and a severe flood $25,000.

(b)Alter the factory building at a cost of $15,000 to withstand moderate flooding without damage and to withstand severe flooding with $10,000 damage.

(c) Alter the factory building at a cost of $20,000 to withstand a severe flood without damage.

In any year the probability of flooding is as follows:

  • P = 0.70 no flooding of the river
  • P = 0.20 moderate flooding
  • P = 0.10 severe flooding

If interest is 15% and a 15-year analysis period is used, what do you recommend?

Reference no: EM131523854

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