A proposed one-year wildfire protection program is meant to add anti-inflamation chemicals on trees to prevent sparks
Question:
A proposed one-year wildfire protection program is meant to add anti-inflamation chemicals on trees to prevent sparks during storms. This (YL) would provide net benefits of $100 million if such fire prevention stops losses of property ($125 million in property damage avoided and $25 million in upfront costs (LC)) during the year. If there is no lightning storm (NL), the program would be associated with a -$25 million net benefits associated with the upfront costs and $0 million property damage avoided. In the county in the region there is a 35% probability of lightning strikes causing a massive fire with property damage. Net benefits also depend upon changes in the cost of chemicals to make the anti-inflamation product; the upfront costs have a 50% probability of rising by 100% in the next months (HC).
a. Calculate the (undiscounted) expected net value of the wildfire protection program assuming the risks are uncorrelated.
Risks uncorrelated, need joint probabilities:
Combo | Joint Probability | Net Benefits | E(NB) |
YL-LC | |||
YL-HC | |||
NL-LC | |||
NL-HC | |||
Financial Accounting
ISBN: 978-0133427530
10th edition
Authors: Walter Harrison, Charles Horngren, William Thomas