An oil company is considering two alternate plans for building an oil pipeline. The first plan costs $1 billion, but goes through an unsafe region that has been recently involved in a war. The second plan costs $2 billion but goes through a safe region. The company estimates that if they build the pipeline through the unsafe region there is a 40% probability that hostilities will resume and the pipeline will be inoperable (i.e., there is a 40% chance that, in addition to the $1 billion spent, they will haveto spend an extra $2 billion to rebuild the pipeline through the safe region). If they build the pipeline through the unsafe region, they can also invest $250 million to develop a security force that would safeguard the pipeline in the event that hostilities break out (they need to invest in the security force before they know whether hostilities will break out or not). Unfortunately, it cannot be guaranteed that security will deter all attacks to the pipeline, and there is a 35% chance that if hostilitiesresume the pipeline will still be damaged. The company is trying to minimize expected costs.

a)Assume that the company is trying to decide the preferred route for the pipeline (assume that it has already been decided that the pipeline will be built). Draw adecision tree describing the situation. What is the decision with the smallest expected cost? Report the smallest expected cost.

b)In this part assume that the company can wait two years before deciding. The expected value of the project decreases by $5 million for each month that construction is delayed. It is determined that if hostilities have not broken out after 2 years, hostilities will no longer be likely. Assuming that the company waits for 2 years, draw a decision tree below describing this situation (there is no need to reproduce the part of the tree drawn in your answer to a). What is the expected cost of the project if they wait two years? Should the company wait, assuming that they are minimizing expected cost?