Recommend a course of action for shamrock oil

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Reference no: EM13829947

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) Using a decision tree, recommend a course of action for Shamrock Oil.You must state your answers within a complete sentence so that your understanding of applying the results of the computations can be observed. You should also include the work for your computation; this will assist in applying partial credit if your answers are not correct.

Reference no: EM13829947

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