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Shamrock Oil owns a parcel of land that has the potential to be an underground oil field. It will cost $450,000 to drill for
Shamrock Oil owns a parcel of land that has the potential to be an underground oil field. It will cost $450,000 to drill for oil. If oil does exist on the land, Shamrock will realize a payoff of $5,000,000 (not including drilling costs). With current information, Shamrock estimates that there is a 0.2 probability that oil is present on the site. Shamrock also has the option of selling the land as is for $500,000, without further information about the likelihood of oil being present. A third option is to perform geological tests at the site, which would cost $50,000. There is a 40% chance that the test results will be positive, after which Shamrock can sell the land for $700,000 or drill the land, with a 0.70 probability that oil exists. If the test results are negative, Shamrock can sell the land for $40,000 or drill the land, with a 0.05 probability that oil exists. Using a decision tree, recommend a course of action for Shamrock Oil. Choose the correct decision tree that corresponds to the options of Shamrock Oil. Note that all payoffs are in thousands of dollars. A. Sell Land $500 Test Land Drill Land Sell Land $650 Q Positive 0.4 Oil $4,500 0.70 Drill Land Dry 0.30 $500 Sell Land - $10 Negative Oil $4,500 Oil 0.6 $4,550 0.2 0.05 Drill Land Dry - $450 0.8 Dry 0.95 - $500 B. Sell Land $500 0 Test Land Sell Land $650 Positive 0.2 Oil $4,550 0.05 Drill Land Dry 0.95 $450 Sell Land - $10 Negative Oil 0.8 $4,500 Oil 0.70 $4,550 0.4 Drill Land Drill Land Dry Dry - $450 - $500 0.30 0.6 O C. Test Land Sell Land $650 Positive Oil 0.4 $4,550 0.70 Drill Land Q D. Sell Land $500 Test Land Dry 0.30 - $450 Sell Land - $10 Negative Oil Oil 0.6 $4,550 0.05 $4,500 0.2 Drill Land Drill Land Dry 0.8 $500 Dry 0.95 - $450 What is the best course of action for Shamrock Oil? A. Drill the land without any investigations. B. Test the land. If the test is positive, sell the land. If the test is negative, drill the land. C. Sell the land without any investigations. D. Test the land. If the test is positive, drill the land. If the test is negative, sell the land. The expected payoff is $ (enter your response as a whole number). Sell Land $650 Positive 0.4 Oil 0.70 $4,500 Drill Land Dry 0.30 - $500 Sell Land - $10 Negative Oil 0.6 Oil 0.05 $4,500 $4,550 0.2 Drill Land Drill Land Dry - $450 0.8 Dry 0.95 - $500 Q
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