1. The hospital management was concerned about the potential loss that might occur

  • June 25, 2021

1. The hospital management was concerned about the potential loss that might occur in the event of a physical catastrophe such as a power failure or a fire. The chief finance officer estimated that the loss from one of these incidents could be as much as 8 billion pesos, including losses due to interrupted service and customer relations. One project the chief finance officer is considering is the installation of an emergency power generator. The cost of the emergency generator is still under study, and if it is installed, no losses from power failures will be incurred. However, if the generator is not installed, there is a 10% chance that a power outage will occur during the next year. If there is an outage, there is a .05 probability that the resulting losses will be very large, or approximately 5 billion pesos in lost earnings. Alternatively, it is estimated that there is a .95 probability of only slight losses of around 250 million pesos. Using decision tree analysis, determine the maximum allowable amount they could invest for a new standby emergency power generator.

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