Shamrock oil owns a parcel of land that has the potential to be an underground o

Question

Shamrock oil owns a parcel of land that has the potential to be an underground oil field. It will cost $500,000 to drill for oil. If oil does exist on the land, shamrock will realize a payoff of $4,000,000 (not including drill cost). With current information, shamrock estimates that there is a 0.2 probability that oil is present on the site. Shamrock also has the option of selling the land as is for $400,000, without further information about the likelihood of oil being present. A third option is to perform geological test at the site, which would cost $100,000. There is a 30% chance that the test results will be positive, after which shamrock can sell the land for $650,000 or drill the land, with a 0.65 probability that oil exists. if the test results are negative, shamrock can sell the land for $50,000 or drill the land, with a 0.05 probability that oil does exists. a) construct the appropriate decision tree to make the appropriate decision using excel

Explanation / Answer

Option 1: Drill for oil

The payoff can be calculated with the following:

            (0.2)($4,000,000

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.