What is the maximum amount the company can pay the geologist

Reference no: EM131066186

Question 11

A nuclear power company is deciding whether to build a nuclear plant at Chico Canyon or at Pleasantville. The cost of building the power plant is $14 million at Chico and $20 million at Pleasantville. If the company builds at Chico, however, and an earthquake occurs at Chico during the next 5 years, construction will be terminated and the company will lose $14 million (and will still have to build a power plant at Pleasantville). Without further information, the company believes there is a 20% chance that an earthquake will occur at Chico during the next 5 years.

Suppose that an actual (not perfectly reliable) geologist can be hired to analyze the earthquake risk. The geologist's past record indicates that he will predict an earthquake on 90% of the occasions for which an earthquake will occur and no earthquake on 85% of the occasions for which an earthquake will not occur. Given this information, What is the maximum amount the company can pay the geologist? (answer format as in example 10,000,000)

Reference no: EM131066186

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