Three options A, B, and C is available for a maintenance engineer. Probabilities

Question

Three options A, B, and C is available for a maintenance engineer. Probabilities and the initial costs are given. Determine the best economic option if the valve is expected to operate for Five years and the interest rate is 7% per year Probabilities, operation costs and initial investments for the three options: Leave valve as is (no initial investment) 60% chance of a $10K loss. 40% chance of $25K loss Repair valve (S10K initial investment to repair) $40% chance of a 56k loss. 60% chance of $5K loss Replace valve (S20K initial investment to replace) No operating losses

Explanation / Answer

Expected loss for Option A = 60% * $10000 loss and 40% * $25000 loss = $16000 loss

Expected loss for Option B = 40% * $6000 loss and 60% * $5000 loss = $5400 loss - $10000 = $15400 loss

Expected loss for Option C = No opeating losses - $20000 = $20000 loss

Choice : OPTION B (being lower loss level)

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