Potential to be an underground oil field

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Reference no: EM131039236

Shamrock Oil owns a parcel of land that has a potential to be an underground oil field. It will cost $500,000 to drill for oil. If oil does exist on the land, Shamrock will realize a profit of $4,000,000 (not including drilling costs). With current information, Shamrock estimates that there is a 0.2 probability that oil is present on the site. Shamrock also has the option of selling the land as is for $4,000,000, without further information about the likelihood of oil being present. A third option is to perform geological tests at the site, which would cost $100,000. There is a 30% chance that the test results will be positive after which Shamrock can sell the land for $650,000 or drill the land, with a 0.65 probability that oil exists. If the test results are negative, Shamrock can sell the land for $50,000 or drill the land, with a 0.05 probability that oil exists. Using a decision tree, recommend a course of action for Shamrock Oil.

Reference no: EM131039236

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