Decision tree-optimum decision for first american bank

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Reference no: EM131984365

The management of First American Bank was concerned about the potential loss that might occur in the event of a physical catastrophe such as a power failure or a fire. The bank estimated that the loss from one of these incidents could be as high as $100 million. One project that the bank is considering is the installation of an emergency power generator at its headquarters. The cost of the emergency generator is $800,000, and if it is installed no losses from this type of incident will be incurred. However, if the generator is not installed, there is a 10% chance that a power outage will occur during the next year. If there is an outage, there is a 5% probability that the resulting losses will be very large, or approximately $80 million in lost earnings. Alternatively, it is estimated that there is a 95% probability of only slight losses of around $1 million. REQUIRED: Using a decision tree, what is the optimum decision for First American Bank?

Reference no: EM131984365

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