QI. An oil company is considering two sites for an exploratory well. Because of budget constraints, only one well can be drilled. Site I is fairly risky, with substantial uncertainty about the amount of oil that can be found. On the other hand, site 2 is fairly certain to produce a low level of oil. Site 1 Cost to drills 100.000 Site Cost to do 200.000 Outcome Payoff Outcome Payolt Probability Dry -$100,000 Day -$200,000 Low producer $150.000 Low producer $50,000 0.5 High producer $ 500.000 The characteristics of the two sites are as follows: If the rock strata underlying Site I are characterized by having a "dome" structure, the chances for finding oil are somewhat greater than if no dome structure exists. The probability of dome structure is P(Dome)-0.7. The conditional probabilities of finding oil at Site I are shown in the table (5 marks) If Dome Structure Exists Outcome Ploutcomel Dome) Pavolt Dry.56 Dry 0.5 100.000 Low 27 Low 0.3 Site 150,000 High 0.2 500,000 If No Dome Structure Exists Outcome Poutcomel No Dome) Dry (0.2) - 200,000 Dry 0.7 Site 2 Low (0.8) Low 0.2 50.000 High 0.1 a. Which option should be selected based on expected monetary value method? b. Plot the risk profiles for each option and assess risk, which option is better? High 12 QI. An oil company is considering two sites for an exploratory well. Because of budget constraints, only one well can be drilled. Site I is fairly risky, with substantial uncertainty about the amount of oil that can be found. On the other hand, site 2 is fairly certain to produce a low level of oil. Site 1 Cost to drills 100.000 Site Cost to do 200.000 Outcome Payoff Outcome Payolt Probability Dry -$100,000 Day -$200,000 Low producer $150.000 Low producer $50,000 0.5 High producer $ 500.000 The characteristics of the two sites are as follows: If the rock strata underlying Site I are characterized by having a "dome" structure, the chances for finding oil are somewhat greater than if no dome structure exists. The probability of dome structure is P(Dome)-0.7. The conditional probabilities of finding oil at Site I are shown in the table (5 marks) If Dome Structure Exists Outcome Ploutcomel Dome) Pavolt Dry.56 Dry 0.5 100.000 Low 27 Low 0.3 Site 150,000 High 0.2 500,000 If No Dome Structure Exists Outcome Poutcomel No Dome) Dry (0.2) - 200,000 Dry 0.7 Site 2 Low (0.8) Low 0.2 50.000 High 0.1 a. Which option should be selected based on expected monetary value method? b. Plot the risk profiles for each option and assess risk, which option is better? High 12