Question
BP has three potential sites where it can build a drilling rig. Due to its past experience, the CEO has instructed his management team to
BP has three potential sites where it can build a drilling rig. Due to its past experience, the CEO has instructed his management team to chooseno more than onesite.
The costs, the revenues and the estimated outcomes for each site are given in the table below.
Probabilities for the different outcomes | ||||
E3 (Dry) Expected revenue:$0M | E2 (Wet) Expected revenue: $5M | E1 (Overflowing) Expected revenue: $30M | Costs (in million $) | Site |
0.2 | 0.8 | 0 | 2 | A |
0.2 | 0.5 | 0.3 | 8 | B |
0.4 | 0.4 | 0.2 | 6 | C |
For example, it costs $8M to build a drilling rig in site B. Theres a 30% chance for E1 with potential revenue of $30M; 50% chance for E2 with potential revenue of $5M; and a 20% chance for E3 with zero revenue.
submit the decision tree(s) to all the questions below
Calculate the EMV
How much would the company be willing to pay for perfect information on all three sites (together)? Note that after finding out the true nature of each site, the company can still choose no more than one site.
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