Abstract

One of the major concerns decision makers face in deciding whether to accept a contract for transport and burial of hazardous wastes is whether there will be spillage during transportation and/or leakage after burial, both of which could significantly impact corporate profitability. To mitigate the possible negative impact of such events, two avenues of damage control are commonly invoked. First, some predetermined risk tolerance is usually established that will not be exceeded for involvement in a project without extremely good reason. Second, potential exposure to the negative aspects (spillage and/or leakage) of a project is limited by assuming<100% working interest in a contract. Although such fractional involvement lowers potential gains, it also mitigates potential liabilities, thus preserving corporate fiscal integrity.

The present study illustrates how such decisions can be made dependent on a level of tolerance to risk and subject to the estimated probabilities of success and failure (spillage and/or leakage), together with the associated costs of various probable events. Exponential and parabolic utility models are employed to demonstrate how decision makers can evaluate a project and assess, for a given contract price, whether involvement in the project is warranted, what fraction of a contract maximizes the return to a company, what is the range of financially viable working interests, and how acceptance of a project, under uncertain conditions and with variable potential expenditures, could influence corporate profits.

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