World’s Largest Carbon Capturing Plant Launches in Iceland

Orca is one of the largest carbon capture plants in Iceland that uses geothermal energy to pull thousands of metric tons of carbon dioxide out of the atmosphere and pump it underground. Using a system of fans, filters and heaters that are powered by a nearby geothermal power plant it has the capacity to pull 4,000 metric tons of carbon dioxide out of the air each year and pump it into underground caverns where the base, mixed with water, will slowly become stone as it cools. Orca is looking to replace one of its older Carbfix units. Although it currently meets all environmental regulations, Orca is concerned with various environmental risks due to the age of the unit including the possibility of fires with potentially toxic emissions. Recent court cases have awarded damages due to hazardous incidents, and Orca, being a more progressive company, would like to avoid such reputational risks. If Orca replaces the Carbfix unit there will be no risk of environmental damages, and the total cost of replacement will be $85,000. Alternatively, if Orca decides to keep the existing unit, the management estimates that there is a 50-50 chance of either a high likelihood incident or a low likelihood incident. For the case in which there is a high likelihood incident, there is a 0.004 probability that a fire will occur sometime during the remaining life of the unit and a 0.996 probability that no fire will occur. If a fire occurs, there is a 0.20 probability that it will cause harm to the environment and will incur a cost of $90 Million for cleanup, whereas there is an 0.80 probably that the fire will be less severe and the cleanup can be accomplished at a lower cost of $8 Million. If no fire occurs, there will be no associated clean up costs incurred by Orca. For the case in which there is a low likelihood that an incident will occur, there is a 0.001 probability that a fire will occur during the life of the existing Carbfix unit, and a 0.999 probability that a fire will not occur. If a fire does occur, the same probabilities exist for the incidence of high and low cleanup costs, as well as the same cleanup costs, as indicated for the previous case. Similarly, if no fire occurs, there is no cleanup cost. Perform a decision tree analysis of this problem for Orca and indicate the recommended solution. Is this the decision you believe the company should make? Explain your rationale