please answer these

Background details [1] A company called BalticSeaProduction Ltd has asked a team of experts to investigate the drilling potential of a new gasfield. The company has already proceeded with developing the field, so the expert team is working on a drilling programme which aims to maximise field production capacity. Evaluating the options, The team finds that the same additional capacity can be obtained either from two vertical wells, or from one horizontal well. Previous economic surveys have provided the data below: Survey number 1 2 Structure of the Well One Horizontal well option Two Vertical wells option Net Present Value (, millions) 15 10 The team has also investigated how the horizontal wells perform operationally compared to two vertical wells: The vertical wells always perform as expected. The horizontal wells often develop mechanical problems requiring additional time and work, which together then reduces the value to 3 million. This reduction is due to production delays and re-working costs. Failure rate has been estimated as 6 in 10. Question 1(a) Given all of the above background information, draw a decision tree and state what is the best decision (and why). (15 marks) Background details [2] The company dislikes the idea of not making the 15 million from a successful horizontal well and considers if there is something in geology data that can help explain the failures. [Therefore, help predict whether a horizontal well will fail or not.] An external geologist consultant claims that he can reliably predict if the horizontal well will fail or not. To do this testing is required; at a cost of 500k. Question 1(b) Given the above information - draw the decision tree representation of the scenario detail the possible outcomes and which one should be chosen (and why)? (25 marks) Background details [3] The geological testing may not be perfectly reliably and so may not always identify if a horizontal well will fail or not. The company obtains a record of the performance of the geologist's performance from previous assessments. This shows that for existing horizontal wells (all drilled without the benefit of his prediction testing method), his method would have correctly predicted failure (or not) for 75% of cases (both for failing and non-failing wells). 1 und details [3] Ine geological testing may not be perfectly reliably and so may not always identify if a horizontal well will fail or not. The company obtains a record of the performance of the geologist's performance from previous assessments. This shows that for existing horizontal wells (all drilled without the benefit of his prediction testing method), his method would have correctly predicted failure (or not) for 75% of cases (both for failing and non-failing wells). Question 1(c) Given the above information draw the decision tree representation of the scenario and detail the possible outcomes and which one should be chosen (and why)? (25 marks) Question 1(d) What is the value of the geological testing information? Please provide two values, i.e. one before and one after the record of the performance of the geologist's performance is obtained (10 marks) (5 marks) Question 1(e) Discuss how NPV differs from EMV Total marks for Question One = 80 marks QUESTION TWO Background An engineering company is planning ahead and have decided to undertake one of four strategies -dependent on the economic outlook. The data in Table 1 gives the Net Present Values (NPV, million) estimated by the company for the four alternative strategies [P.Q.R.S] in relation to the economic outlooks. Economic outlook Strategy P Q R S Table 1: NPVS ( million) Good 30 15 35 45 Medium 25 15 30 10 Determine which strategy (and why) the company should select if they use the following criteria a) Maximin b) Laplace c) Maximax d) Hurwicz (with a = 0.6) e) Minimax Regret (2 marks) (2 marks) Poor -15 15 -5 -5 (2 marks) (2 marks) (2 marks). f) Plot a sensitivity analysis from the Table 1 data, and provide comment. (4 marks) g) Describe what is "a" in the Hurwicz equation. (2 marks) h) New information suggests the probabilities of Poor, Medium and Good economic outlooks are 0.2, 0.5 and 0.3 respectively. Given this on the basis of Expected Monetary Value, what strategy (and why) should be considered as the best alternative? (4 marks) Background details [1] A company called BalticSeaProduction Ltd has asked a team of experts to investigate the drilling potential of a new gasfield. The company has already proceeded with developing the field, so the expert team is working on a drilling programme which aims to maximise field production capacity. Evaluating the options, The team finds that the same additional capacity can be obtained either from two vertical wells, or from one horizontal well. Previous economic surveys have provided the data below: Survey number 1 2 Structure of the Well One Horizontal well option Two Vertical wells option Net Present Value (, millions) 15 10 The team has also investigated how the horizontal wells perform operationally compared to two vertical wells: The vertical wells always perform as expected. The horizontal wells often develop mechanical problems requiring additional time and work, which together then reduces the value to 3 million. This reduction is due to production delays and re-working costs. Failure rate has been estimated as 6 in 10. Question 1(a) Given all of the above background information, draw a decision tree and state what is the best decision (and why). (15 marks) Background details [2] The company dislikes the idea of not making the 15 million from a successful horizontal well and considers if there is something in geology data that can help explain the failures. [Therefore, help predict whether a horizontal well will fail or not.] An external geologist consultant claims that he can reliably predict if the horizontal well will fail or not. To do this testing is required; at a cost of 500k. Question 1(b) Given the above information - draw the decision tree representation of the scenario detail the possible outcomes and which one should be chosen (and why)? (25 marks) Background details [3] The geological testing may not be perfectly reliably and so may not always identify if a horizontal well will fail or not. The company obtains a record of the performance of the geologist's performance from previous assessments. This shows that for existing horizontal wells (all drilled without the benefit of his prediction testing method), his method would have correctly predicted failure (or not) for 75% of cases (both for failing and non-failing wells). 1 und details [3] Ine geological testing may not be perfectly reliably and so may not always identify if a horizontal well will fail or not. The company obtains a record of the performance of the geologist's performance from previous assessments. This shows that for existing horizontal wells (all drilled without the benefit of his prediction testing method), his method would have correctly predicted failure (or not) for 75% of cases (both for failing and non-failing wells). Question 1(c) Given the above information draw the decision tree representation of the scenario and detail the possible outcomes and which one should be chosen (and why)? (25 marks) Question 1(d) What is the value of the geological testing information? Please provide two values, i.e. one before and one after the record of the performance of the geologist's performance is obtained (10 marks) (5 marks) Question 1(e) Discuss how NPV differs from EMV Total marks for Question One = 80 marks QUESTION TWO Background An engineering company is planning ahead and have decided to undertake one of four strategies -dependent on the economic outlook. The data in Table 1 gives the Net Present Values (NPV, million) estimated by the company for the four alternative strategies [P.Q.R.S] in relation to the economic outlooks. Economic outlook Strategy P Q R S Table 1: NPVS ( million) Good 30 15 35 45 Medium 25 15 30 10 Determine which strategy (and why) the company should select if they use the following criteria a) Maximin b) Laplace c) Maximax d) Hurwicz (with a = 0.6) e) Minimax Regret (2 marks) (2 marks) Poor -15 15 -5 -5 (2 marks) (2 marks) (2 marks). f) Plot a sensitivity analysis from the Table 1 data, and provide comment. (4 marks) g) Describe what is "a" in the Hurwicz equation. (2 marks) h) New information suggests the probabilities of Poor, Medium and Good economic outlooks are 0.2, 0.5 and 0.3 respectively. Given this on the basis of Expected Monetary Value, what strategy (and why) should be considered as the best alternative? (4 marks)