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Determine oilco optimal course of action

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Reference no: EM132022918

Question: Oilco must determine whether or not to drill for oil in the South China Sea. If the decision is "not drilling", the option can be sold for $10 million. If "drilling" is chosen, the well can occur to be dry with probability of 0.5 which would result in a loss of $70 million. The well may be wet with probability of 0.3 and a resultant payoff of $50 million, or may gush out with probability of 0.2 and a resultant payoff of $200 million. Assuming that Oilco is a risk-neutral decision maker, answer the following questions.

a) Determine Oilco's optimal course of action.

b) Determine EVPI.

Reference no: EM132022918

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