Description
Orca is one of the largest carbon capture plants in Iceland that uses geothermal energy to pullthousands of metric tons of carbon dioxide out of the atmosphere and pump it underground. Using asystem of fans, filters and heaters that are powered by a nearby geothermal power plant it has thecapacity to pull 4,000 metric tons of carbon dioxide out of the air each year and pump it intounderground caverns where the base, mixed with water, will slowly become stone as it cools. Orca islooking to replace one of its older Carbfix units. Although it currently meets all environmentalregulations, Orca is concerned with various environmental risks due to the age of the unit including thepossibility of fires with potentially toxic emissions. Recent court cases have awarded damages due tohazardous incidents, and Orca, being a more progressive company, would like to avoid such reputationalrisks. If Orca replaces the Carbfix unit there will be no risk of environmental damages, and the total costof replacement will be $85,000. Alternatively, if Orca decides to keep the existing unit, the managementestimates that there is a 50-50 chance of either a high likelihood incident or a low likelihood incident.For the case in which there is a high likelihood incident, there is a 0.004 probability that a fire will occursometime during the remaining life of the unit and a 0.996 probability that no fire will occur. If a fireoccurs, there is a 0.20 probability that it will cause harm to the environment and will incur a cost of $90Million for cleanup, whereas there is an 0.80 probably that the fire will be less severe and the cleanupcan be accomplished at a lower cost of $8 Million. If no fire occurs, there will be no associated clean upcosts incurred by Orca. For the case in which there is a low likelihood that an incident will occur, there isa 0.001 probability that a fire will occur during the life of the existing Carbfix unit, and a 0.999probability that a fire will not occur. If a fire does occur, the same probabilities exist for the incidence ofhigh and low cleanup costs, as well as the same cleanup costs, as indicated for the previous case.Similarly, if no fire occurs, there is no cleanup cost.Perform a decision tree analysis of this problem for Orca and indicate the recommended solution. Is thisthe decision you believe the company should make? Explain your rationale
