Oil Drilling problem. Mr. Bob smith of Idaho is about to exercise his option to drill for oil on a promising piece of land. Should he drill?

If he hits a gusher there is an estimated $1M of revenue to be gained. After careful analysis of the problem, he came up with the following list of alternatives and risks:

a. He paid $20,000 for the drilling option.

b. He could lower his risks if he hired a geologist to perform seismic testing ($50,000). That would give him a better indication of success and lower his risk of wasting drilling costs.

c. Should he take a risk and incur $200,000 in drilling costs without a seismic evaluation to guide him?

d. He consulted with the oil experts. They believe his parcel has a 60% chance of having oil without the benefit of any test.

e. It has been the experts experience that if seismic tests are positive for the oil, there is a 90% chance that there is some oil. And conversely, there is a 10% chance of failure.

f. If the seismic tests are negative, he could still drill but with a 10% chance of success and a 90% chance of failure.

g. he could decide not to drill at all. What should he do?