Your company is conducting a risk assessment on the construction – Free Nursing Tutor

Your company is conducting a risk assessment on the construction of an oil pipeline

project. If you build the pipeline, you will receive a total of between $200 million to

$400 million in royalties over the 20-year life of the pipeline. Unfortunately, there is a

risk of a rupture, and if the pipeline ruptures, your company will be liable for $800

million in damages. The probability of a rupture is low, however, at a level of

Prupture = 0.03. If there is a rupture, there is a 0.25 probability that political pressure

from the state in which the rupture occurs and unwelcome attention from the US

Congress and federal regulators will cause the total losses to the company to

quadruple to $3.2 billion.

Assume the income level from royalties is distributed uniformly. Use discrete

variables to represent the occurrence of a rupture and the likelihood of government

intervention.

What is the expected value (average outcome) of this pipeline project to your

company? Out of 10,000 trials, how often will your company experience a loss on

this project?

Please let me know if you have any questions.

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