Question: Question 6:

Your town is located on the shores of the Atlantic Ocean, directly in the line of devastating hurricanes. You are evaluating a policy to invest $10 million in emergency preparedness. It is estimated that the chance that a moderate to strong hurricane (categories 2 and 3) will come your way next year is 30 percent. The chance of being hit by a devastating category 4 hurricane is 5 percent. Right now, without this additional preparation, the town can handle small tropical storms without much problem or property loss. If there is a category 2 or 3 hurricane, however, the estimated loss will be about $15 million, and for a fierce category 4 storm, the estimated property loss could rise as high as $50 million.

The financial administration department estimates that with the $10 million invested, the town will be able to withstand a strong hurricane of category 2 or 3 with a minimum damage of $5 million. Even if there is a giant hurricane of category 4, the damage estimate goes no higher than $20 million. Should the town invest the money in disaster preparedness? In Excel, build the decision tree and use it in support of explaining your recommendation.