You own a manufacturing facility in Northern California. The damage expected if an earthquake occurs is $20 million. The probability of an earthquake over the life of your plant (20 yrs) in Northern California is 50%. If you reinforce your building, the damage expected if an earthquake occurs will be lowered to $5 million. Reinforcing the building will cost $2 million.

a. What is the expected value of perfect information regarding whether an earthquake will occur over the life of the plant?

b. Some additional historical information is as follows. That is, in 80% of the places where an earthquake has occurred in the past 20 years, the nearest fault line was 20 miles or less away. However, 50% of the places where an earthquake has not occurred in the past 20 years were also within 20 miles of the nearest fault line. It will cost $80,000 to locate the nearest fault line with a seismic test. 

c. Calculate the expected value of purchasing the seismic test information.

Answer rating: 100% (QA)

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