The company is considering whether or not they should drill the land. The cost of drilling is estimated to be $4 million. The company believes there are three possible findings after drilling the land: dry, wet andgushing. The probabilities for these outcomes are 0.5, 0.3 and 0.2, respectively. If the land is found to be dry, it obviously offers no profit. If the land is wet, it brings a potential profit of $10 million. If gushing, thepotential profit from the land is $30 million. Answer the following questions, Q1 and Q2.Q1: Draw a decision tree to show the decision for this company based on the EMV criterion. Nodes and arcs are provided below and you can make more of them by using "copy" and "paste"Q2: The company has the option of using some new technology and equipment combined with seismic survey data to learn the presence of oil (dry, wet or gushing) before drilling the land. However, it requires$2.3 million investment for the technology, equipment, and required analysis. Is it worth eliminating uncertainty about finding the oil? Calculate EVPI to justify your answer.

1. EMV for drilling = (0.5 X 0 + 0.3 X 10000000 + 0.2 X 30000000) - Cost incurred in drilling…

Answered: The company is considering whether or…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 37P

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