Reference no: EM13670966

1. Reset to base values and click to the tree. What probability of discovery would make the driller indifferent between drilling and not drilling?

2. Reset to base values. What is the largest investment cost that the driller could entertain and still decide to drill?

3. Reset to base values. Change the P10 value for Future Oil Price from $30/Bbl to $10/Bbl. What is the new expected NPV? Note that you have not changed the "best guess" value of oil price from $70/Bbl. Why does the expected NPV change?

4. Reset to base values. Change the initial production rate from 8,000 Bbl/day to 10,000 Bbl/day. What is the new expected NPV? Note that you have not changed the recoverable reserves. Why is it higher? What does this tell you about the significance of realising a high initial production rate?

5. Click to the tree. You can look at this tree and, not looking at any of the numbers, immediately see that there is value to obtaining perfect information on recoverable reserves. What indicates that we have positive value of perfect information?

6. What is the expected value of perfect information on reserves?

7. Click to the S-curve. What has happened to the probability of destroying shareholder value? Why? What does this tell you about the effect on risk of obtaining additional information?

8. What is the value of imperfect information provided by the G&G? Is it more or less than the value of perfect information and why?

9. Change the values in the input cells to make the imperfect information perfect. What values do you need to input to accomplish this? How does the expected NPV compare to the expected NPV on the value of perfect information tab?

10. Reset to base values. Change the values in the input cells to make the imperfect information of zero value (Hint: Change them to reflect the situation without information depicted in the Drill Decision tab). What values do you need to input to accomplish this?

11. Reset to base values and note again the expected NPV. Now reverse the inputs in cells Q6 and Q8 (i.e., set cell Q6 to 5% and cell Q8 to 80%). The expected NPV should not change and therefore the value of imperfect information should not change. On the surface, these inputs say the G&G provides terrible information. Can you explain why it still shows as delivering the same value of imperfect information?

12. Reset to base values. Click to the S-curve and note the probability of destroying shareholder value. Now go the Value of Perfect Info tab, click to the S-curve and note the probability of destroying shareholder value there. The probability of destroying shareholder value with perfect information is higher than the probability with imperfect information.

By this measure, perfect information seems to increase downside risk compared to imperfect information-better information appears to increase risk. Can you explain this apparently non-intuitive result?

Attachment:- Interactive model.rar