Slove both questions

QUESTION ONE Background A construction company is planning ahead and will 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 (A, B, C, D] in relation to the economic outlooks. Economic outlook Strategy Excellent Average Poor 30 25 -15 B 15 15 15 C 35 30 -5 D 45 10 -5 Table 1: NPVs ($ million) Determine which strategy (and why) the company should select if they use the following criteria a) Maximin (2 marks) b) Maximax (2 marks) c) Laplace (2 marks) d) Hurwicz (with a = 0.8) (2 marks) e) Minimax Regret (2 marks) f) New information suggests the probabilities of Excellent, Average and Poor economic outlooks are 0.3, 0.6 and 0.1 respectively. Given this - on the basis of Expected Monetary Value, what strategy (and why) should be considered as the best alternative? (4 marks) g) Plot a sensitivity analysis from the Table 1 data, and provide comment. (4 marks) h) Describe what is meant by the index of optimism. (2 marks) QUESTION TWO Background details (1) A company called North SeaProduction Ltd has asked a team of experts to investigate the drilling potential of a new oil field. 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 derived the data below: . . Survey number Structure of the Well Net Present Value (millions) $15 1 One Horizontal well option Two Vertical wells option 2 $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 workover costs. Failure rate has been estimated as 3 in 5. Question 2(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 succe 2/3 I v and considers if there is something in geology data that can help explain the univo. (Henc help predict whether a horizontal well will fail or not.] An external geologist consultant claims that she can reliably predict if the horizontal well will fail or not. To do this testing is required at at cost of $500,000. Question 2(b) 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) Background details (3) The geological testing may not 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 her prediction testing method), her method would have correctly predicted failure (or not) for 3 out of 4 cases both for failing and non-failing wells. 2 Question 2c) 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 2d) What is the value of the geological testing information? Please provide two values, so one before and one after the record of the performance of the geologist's performance is obtained (10 marks) Question 2(e) Explain the differences between Expected Utility Value and Expected Monetary Value. (5 marks) QUESTION ONE Background A construction company is planning ahead and will 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 (A, B, C, D] in relation to the economic outlooks. Economic outlook Strategy Excellent Average Poor 30 25 -15 B 15 15 15 C 35 30 -5 D 45 10 -5 Table 1: NPVs ($ million) Determine which strategy (and why) the company should select if they use the following criteria a) Maximin (2 marks) b) Maximax (2 marks) c) Laplace (2 marks) d) Hurwicz (with a = 0.8) (2 marks) e) Minimax Regret (2 marks) f) New information suggests the probabilities of Excellent, Average and Poor economic outlooks are 0.3, 0.6 and 0.1 respectively. Given this - on the basis of Expected Monetary Value, what strategy (and why) should be considered as the best alternative? (4 marks) g) Plot a sensitivity analysis from the Table 1 data, and provide comment. (4 marks) h) Describe what is meant by the index of optimism. (2 marks) QUESTION TWO Background details (1) A company called North SeaProduction Ltd has asked a team of experts to investigate the drilling potential of a new oil field. 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 derived the data below: . . Survey number Structure of the Well Net Present Value (millions) $15 1 One Horizontal well option Two Vertical wells option 2 $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 workover costs. Failure rate has been estimated as 3 in 5. Question 2(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 succe 2/3 I v and considers if there is something in geology data that can help explain the univo. (Henc help predict whether a horizontal well will fail or not.] An external geologist consultant claims that she can reliably predict if the horizontal well will fail or not. To do this testing is required at at cost of $500,000. Question 2(b) 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) Background details (3) The geological testing may not 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 her prediction testing method), her method would have correctly predicted failure (or not) for 3 out of 4 cases both for failing and non-failing wells. 2 Question 2c) 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 2d) What is the value of the geological testing information? Please provide two values, so one before and one after the record of the performance of the geologist's performance is obtained (10 marks) Question 2(e) Explain the differences between Expected Utility Value and Expected Monetary Value