Reference no: EM131244453
A factory building is located in an area subject to occasional flooding by a nearby river. You have been brought in as a consultant to determine whether flood-proofing of the building is economically justified. The alternatives are as follows:
Do nothing. Damage in a moderate flood is $10,000 and a severe flood $25,000.
Alter the factory building at a cost of $15,000 to withstand moderate flooding without damage and to withstand severe flooding with $10,000 damage.
Alter the factory building at a cost of $20,000 to withstand a severe flood without damage.
In any year the probability of flooding is as follows:
P = 0.70 no flooding of the river
P = 0.20 moderate flooding
P = 0.10 severe flooding
If interest is 15% and a 15-year analysis period is used, what do you recommend?
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