Problem 1 · Expected value and expected error in decision making
A buried water main has a 0.03 annual probability of failure, and a failure causes $1.2 million in damage. A monitoring system costs $15,000 per year and reduces the annual failure probability to 0.01. The expected annual net savings from installing the monitoring system, after paying its $15,000 annual cost, is most nearly:
- A.$9,000
- B.$21,000
- C.$24,000
- D.$27,000
Show the answer and solution
Answer: A: $9,000
Without monitoring the expected annual cost is 0.03($1.2M) = $36,000. With monitoring it is $15,000 + 0.01($1.2M) = $27,000. Savings = $36,000 − $27,000 = $9,000 per year. The $24,000 risk reduction must still pay for the $15,000 monitoring cost.
Expected value and expected error in decision making · Reference Handbook: Engineering Probability and Statistics
