What action should executive take to maximize expect profits

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A chief executive of an oil company must decide whether to drill a site and, if so, hew deep. It costs $160,000 to drill the first 3,000 feet, and there is a 0.4 chance of striking oil. If oil is struck, the profit (net of drilling expenses) is $600,000. If she does not strike oil, the executive can drill 2,000 feet deeper at an additional cost of $90,000. Her chance of finding oil between 3,000 and 5,000 feet is 0.2 and her net profit (after all drilling costs) from a stroke at this depth is $400,000. What action should the executive take to maximize expected profit?

Reference no: EM13242779

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