A factory building is located in an area subject to occasional flooding by a nearby river. You have been
brought in as a consultant to determine whether flood proofing of the building is economically justified.
The alternatives are as follows:
A. Do nothing. Damage in a moderate flood is $10,000 and in a severe flood, $25,000.
B. Alter the factory building at a cost of $15,000 to withstand moderate flooding without damage
and to withstand severe flooding with $10,000 damages.
C. Alter the factory building at a cost of $20,000 to withstand a severe flood without damage.
In any year the probability of flooding is as follows: 0.70, no flooding of the river; 0.20, moderate flooding;
and 0.10, severe flooding. If interest is 15% and a 15-year analysis period is used, what do you
Answer is given below for three sub-parts: