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VALUE OF INFORMATION / TUTORIALOUTLET DOT COM

Part A, Value of Information Suppose a city is considering developing a brownfield site but believes there is a 50% chance the site is contaminated with hazardous waste.

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VALUE OF INFORMATION / TUTORIALOUTLET DOT COM

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  1. VALUE OF INFORMATION / TUTORIALOUTLET DOT COM

  2. VALUE OF INFORMATION / TUTORIALOUTLET DOT COM Value of Information FOR MORE CLASSES VISIT www.tutorialoutlet.com Part A, Value of Information Suppose a city is considering developing a brownfield site but believes there is a 50% chance the site is contaminated with hazardous waste. If the site is clean (call that state "C"), the net present value of development will be $10 million. However, if the site is discovered to be contaminated during the construction process (call that state "D" for "dirty"), the site will have to be remediated and the net present value will be -$20 million. It is possible to test the site for contamination prior to making the decision to develop. However, the test costs $1 million and is imperfect: when contamination is present, the test will fail to detect it 20% of the time. Moreover, the test has a 10% chance of falsely indicating that a clean site is contaminated. What is the expected present value of the test? Should the city buy it? In doing your calculations, you should assume that if the city chooses not to develop, it does not have to pay any remediation costs -- it only has to pay for the test itself.

  3. VALUE OF INFORMATION / TUTORIALOUTLET DOT COM Thank you

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