Which site should be chosen based on expected monetary value

Reference no: EM13560285

Two sites, A & B, are being considered for the construction of a dam. Construction at Site A will cost $20 million and have an annual benefit of $2 million. Construction at Site B will cost $30 million and have an annual benefit of $3 million. The mean occurrence rate (?) of earthquakes at each site is uncertain. At Site A, there is a 60% probability that ? = 0.02 EQ/yr and a 40% probability that ? = 0.04 EQ/yr. At Site B, there is a 70% probability that ? = 0.01 EQ/yr and a 30% probability that ? = 0.02 EQ/yr. Which site should be chosen based on expected monetary value (EMV), considering the expected return period for damaging earthquakes. Damage from an earthquake costs $7 million to repair. Use an interest rate, i = 10% and a 100-year design life for the dam.

Reference no: EM13560285

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