Question

An oil company must decide whether to drill off the coast of Sable Island. It costs...

An oil company must decide whether to drill off the coast of Sable Island. It costs $1 million to drill, and if oil is found its value is estimated at $6 million. At present, the company believes there is a 45% chance that oil is present. Before drilling begins, the oil company can hire a geologist for $100,000 to obtain samples and test for oil. There is only about a 60% chance that the geologist will issue a favourable report. Given that the geologist does issue a favourable report, there is an 80% chance that there is oil. Given an unfavourable report, there is a 10% chance that there is oil. Use a decision tree to determine what the oil company should do.

Math   Statistics-And-Probability   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The senior executives of an oil company are trying to decide whether or not to drill...
The senior executives of an oil company are trying to decide whether or not to drill for oil in a particular field in the Gulf of Mexico. It costs the company $1,000,000 to drill in the selected field. Company executives believe that if oil is found in this field its estimated value will be $4,000,000. At present, this oil company believes there is a 45% chance that the selected field actually contains oil. Before drilling, the company can hire a...
Florida Seaside Oil Exploration Company is deciding whether to drill for oil off the northeast coast...
Florida Seaside Oil Exploration Company is deciding whether to drill for oil off the northeast coast of Florida. The company estimates that the project would cost $4.6 million today. The firm estimates that once drilled, the oil will generate positive cash flows of $2.3 million a year at the end of each of the next four years. While the company is fairly confident about its cash flow forecast, it recognizes that if it waits two years, it would have more...
The Aaron Oil Company is deciding whether to drill for oil on a tract of land...
The Aaron Oil Company is deciding whether to drill for oil on a tract of land the company owns. The company estimates the project would cost $10 million today. Aaron estimates that, once drilled, the oil will generate positive net cash flows of $3.4 million a year at the end of each of the next 5 years. Although the company is fairly confident about its cash flow forecast, in 1 years it will have more information about the local geology...
Simon Lafleur is the founder and sole proprietor of Wetaskawin Wildcatters (WW). WW develops oil wells...
Simon Lafleur is the founder and sole proprietor of Wetaskawin Wildcatters (WW). WW develops oil wells in unproven territory. Simon has poured his life savings into WW in the hope of finding a major well. WW has purchased drilling rights on a number of tracts that have been spurned by the major oil companies. Simon has just received a report from his consulting geologist that one of these tracts looks modestly promising. The geologist has stated that based on his...
Investment Timing Option: Decision-Tree Analysis The Karns Oil Company is deciding whether to drill for oil...
Investment Timing Option: Decision-Tree Analysis The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates the project would cost $13 million today. Karns estimates that, once drilled, the oil will generate positive net cash flows of $6.11 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, in 2 years it will have...
The Karns Oil Company is deciding whether to drill for oil on a tract of land...
The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates the project would cost $9 million today. Karns estimates that, once drilled, the oil will generate positive net cash flows of $4.14 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, in 2 years it will have more information about the local...
Investment Timing Option: Decision-Tree Analysis The Karns Oil Company is deciding whether to drill for oil...
Investment Timing Option: Decision-Tree Analysis The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates the project would cost $7 million today. Karns estimates that, once drilled, the oil will generate positive net cash flows of $3.43 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, in 2 years it will have...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT