Reference no: EM131128434

Oil Co. must determine whether or not to drill for oil in the South China Sea. It costs $200,000 to drill; and if the oil is found the net value is estimated to be $900,000. At present, Oil Co. believes there is a 40% chance that the field contains oil (O). Before drilling, Oil Co. can hire (for $12,000) a geologist to obtain more information about the likelihood that the field will contain oil (denote the state of NO OIL in the field by O ¯ or O^'). The geologist’s report could be classified being either favorable (F) predicting oil, or unfavorable (U) predicting a dry well. The geologist’s professional record reveals that in the past he had issued a favorable report to 88% of successful oil hits and an unfavorable report to 95% of unsuccessful oil drillings. Model Oil Co’s decision problem as a decision tree and determine its optimal strategy. Calculate EVSI,EVPI and the efficiency of the geologist’s sampling service.