Considering replacing its fleet of gas-powered cars

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A city is considering replacing its fleet of gas-powered cars with electric cars. If the electric cars perform to their potential, the city will experience savings of $1.5m. If the new technology fails, the cost to the city will be $675,000. A third possibility is that less serious problems occur and the city will breakeven. The city estimates these three outcomes have probabilities 0.3, 0.3, and 0.4.

Based on this information should the city switch to electric cars?

What is the EVPI on the success or failure of the project?

The city could also implement a pilot program involving renting a small number of electric cars and running them for a few months. This program would cost the city $75,000. Other cities in the country have used this kind of pilot program.

What is the probability that the pilot program will indicate success of the project?

Given that the pilot program indicates success, what is the (i) probability that the project will actually succeed? (ii) the probability that the project will breakeven?

Given that the pilot program indicates failure, what is the (i) probability that the project will actually succeed? (ii) the probability that the project will breakeven?

What should the city do? Should they conduct the pilot program?

What is the most they should be willing to pay for this pilot program?

Reference no: EM132250740

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