Decision analysis / Operations Management (Perform a decision-tree analysis of this problem)
My Electric Service is attempting to decide whether it should replace an old PCB transformer. Even though the PCB generator meets all current regulations, if an incident occurred such as a fire, the PCB contamination would cause much harm and damage.
If the utility replaces the PCB transformer, no PCB incidents will occur, and the only cost will be the cost of it, which is $85,000.
Alternatively, if the company decides to keep the existing transformer, then management estimates that there will be a 50-50 chance of there being a high-likelihood or a low likelihood incident.
For the high-likelihood of an incident-- There is a .004 probability that a fire will occur during the remaining life of the transformer and a 0.996 probability that no fire will occur. If a fire occurs, there is a .20 probability that it will be bad and the utility will incur a $90 million cleanup and damage cost, whereas there is a .80 probability that the fire will be minor and a cleanup can be accomplished at a low cost of $8 million.
For the low-likelihood of an incident?there is a .001 probability that a fire will occur during the life of the existing transformer and a .999 probability that a fire will not occur. If a fire occurs, there is a .20 probability that it will be bad and the utility will incur a $90 million cleanup and damage cost, whereas there is a .80 probability that the fire will be minor and a cleanup can be accomplished at a low cost of $8 million.
Perform a decision-tree analysis of this problem and choose whether to or not to replace the transformer.