Peter J Wilcoxen > PAI 789 Advanced Policy Analysis

Computing Upgrade

An agency is considering whether to upgrade its computer network. Its current system costs $10 million to operate and produces $30 million in benefits. If it upgrades, its costs will go up to $20 million. However, the impact on benefits is uncertain. There is a 60% chance the upgrade will be very successful and benefits will be $60 million, but there's a 40% chance the upgrade will go badly and benefits would only be $20 million.

  1. Please draw an appropriate decision tree and compute the expected value of the upgrade. Should the agency proceed?
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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 01/23/2020