### What is the probability of a favorable seismic survey

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##### Reference no: EM131034756

The Mobile Oil company has recently acquired oil rights to a new potential source of natural oil in Alaska. The current market value of these rights is \$90,000. If there is natural oil at the site, it is estimated to be worth \$800,000; however, the company would have to pay \$100,000 in drilling costs to extract the oil. The company believes there is a 0.25 probability that the proposed drilling site actually would hit the natu- ral oil reserve. Alternatively, the company can pay \$30,000 to first carry out a seismic survey at the proposed drilling site. The probability of a favorable seismic survey when oil is present at the drilling site is 0.6. The probability of an unfavorable seis- mic survey when no oil is present is 0.80.

a) What is the probability of a favorable seismic survey?

b) What is the probability of an unfavorable seismic survey?

c) Construct a decision tree for this problem.

d) What is the optimal decision strategy using the EMV criterion?

e) To which financial estimate in the decision tree is the EMV most sensitive?

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