Hired or not based only the expected monetary value

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Reference no: EM131372011

A warehouse needs pest treatment that requires opening all the windows and covering the building with a tent for 48 hours. Opening the windows means deactivating the alarm system. The warehouse owner is concerned about theft during this time. He has insurance to cover losses due to theft, but the policy has a large deductible. He is thinking of hiring a security firm to provide on-site guards during the 48 hours the security system is off. The following information applies:

Insurance deductible: $25,000

Cost of on-site guards: $150/hour

Probability of theft during the 48-hour period if unguarded and without an alarm system: 30%

Probability of theft if on-site guards are present: 3%

Assume that if a theft occurs, the total amount stolen will exceed $25,000. Construct a decision tree that determines whether guards should be hired or not based only the expected monetary value.

Reference no: EM131372011

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