The decision tree costs and benefits of present value, Basic Statistics

Question:

Imagine that your client, Hillside County Forest Preserve (HCFP), is considering how best to protect their natural lagoons.  They have asked for your help, and you have found the following/

  • If they do nothing, the lagoons are sure to deteriorate and have a societal cost of $100,000
  • If they enact an experimental new program, called Lagoon Preservation Project ("LPP"), then there is a 50% chance that it will be successful, yielding a societal benefit of $70,000. There is a 50% chance it will not be successful, causing further harm to the lagoons, yielding a societal cost of $150,000
  • Enacting LPP will cost $10,000

Assume all costs and benefits above are expressed in present values.

a.  Which option has the higher expected benefit to society? Show the decision tree that supports your answer.

b.  What would the likelihood of success of LPP need to be for enacting it to have the same Expected Value as not enacting it?

Posted Date: 2/16/2013 7:52:07 AM | Location : United States







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