Q.2 You are an owner of a large land in Al-Wusta region. A geology expert from S

Question

Q.2 You are an owner of a large land in Al-Wusta region. A geology expert from Schlumberger has told you that there is a chance of getting oil from your land. Based on his experience he also informed you that the probability of getting a large oil well reserve is (P 0.1),getting a small oil well reserve is (p2 0.3) and getting a dry hole is (ps 0.6). You have three alternative choices: (1) Don't drill (Ai); (2) Drill alone (A2): 3) Lease out to an oil drilling company (As). Outcome for the three altematives are expected to be: 1. If you don't drill: no profit and no loss 2. If you drill alone: the profit of RO9.3 million if a large well is found; profit of RO 300,000 if a small well is found; and a loss of RO 500,000 in case the well is dry. If you lease out the profit of RO 1.25 million if a large well is found: profit of RO 125,000 if a small well is found; and no profit no loss in case the well is dry 3. Set up a payoff table (decision) matrix for this problem and show which alternative maximizes expected value. If you have no idea about the probabilities what would be your decision based on minimizing the maximum regret assumption a) b) cFind EVPI and the altemative with Minimum EOL

Explanation / Answer

Drilling Option pay off Probability Event Introduce Value using perfact prediction 0.1 large oil well 9300000 930000 930000 0.3 small oil well 300000 90000 90000 0.6 dry hole -500000 -300000 0 Expected value 720000 1020000 EVVU EVPP EVPI : 1020000-720000 : 300000 Lease Option pay off Probability Event Lease option Value using perfact prediction 0.1 large oil well 1250000 125000 125000 0.3 small oil well 125000 37500 37500 0.6 dry hole 0 0 0 Expected value 162500 162500 EVVU EVPP EVPI : 162500-162500 : 0

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