The Mobile Oil company has recently acquired oil rights to a new potential source of natural oil in Alaska. The current market value of these rights is $90,000. If there is natural oil on the site, it is estimated to be worth $800,000; however, the company would have to pay $100,000 in drilling costs to extract the oil. The company believes there is a 0.25 probability that the proposed drilling site would actually hit the natural oil reserve. Alternatively, the company can pay $30,000 to first carry out a seismic survey at the proposed drilling site. The probability of a favorable seismic survey when oil is present at the drilling site is 0.6. The probability of an unfavorable seismic survey when no oil is present is 0.80.

a)What is the probability of a favorable seismic survey?

b)What is the probability of an unfavorable seismic survey?

c)Construct a decision tree for this problem

d) What is the optimal decision strategy using the EMV criterion? e) To which financial estimate in the decision tree is the EMV most sensitive?

I found an answer already that I have attached in regards to the construction of the tree plan but it was incorrect.

My professor emailed me to correct it with this response:

"There is a basis flaw in the logic of your treeplan. It is that the no drill option that you assumed does not exist, but a sell option with a positive net asset value does. Redo it with that in mind. See you Monday night."

I attached the previous answer that I had found.

The Mobile Oil company has recently acquired oil rights to a new potential source of natural oil in Alaska. The current market value of thes costs to extract the oil. The company believes there is a 0.25 probability that the proposed drilling site would actually hit the natural oil res survey when oil is present at the drilling site is 0.6. The probability of an unfavorable seismic survey when no oil is present is 0.80. a)What is the probability of a favorable seismic survey? b)What is the probability of an unfavorable seismic survey? c)Construct a decision tree for this problem d) What is the optimal decision strategy using the EMV criterion? e) To which financial estimate in the decision tree is the EMV most sensitive? Solution a)What is the probability of a favorable seismic survey? Answer Let Probability of favorable seismic survey be x so 0.6*x + (0.2)*(1-x)= 0.25 so x = 0.05/0.4 = 0.125 b)What is the probability of an unfavorable seismic survey? Answer 0.875 Probability of unfavorable survey = d) What is the optimal decision strategy using the EMV criterion? Answer Optimal decision is to do drilling if survey shows favorable results. e) To which financial estimate in the decision tree is the EMV most sensitive? Answer It is sensitive most to the Payoff i.e $ 800000 The other sensitivity is to the probability of no oil under unfavorable seismic survey. 25.0% Find Oil 800,000.00 -100000 #NAME? Chance (100,000.00) 100000 No oil reserve 75.0% 0 New Tree Decision 100000 Survey shows favorable 12.5% 0 conduct seismic survey #NAME? Chance (30,000.00) 70000 Survey shows unfavorable 87.5% 0 oil in Alaska. The current market value of these rights is $90,000. If there is natural oil on the site, it is estimated to be worth $800,000; however, the co rilling site would actually hit the natural oil reserve. Alternatively, the company can pay $30,000 to first carry out a seismic survey at the proposed drillin c survey when no oil is present is 0.80. 25.0% 700000 75.0% -100000 Find Oil 60.0% 800,000.00 Do drilling #NAME? Chance 0.0% 670000 Do drilling (100,000.00) 350000 No oil Reserve 40.0% 0 0.0% -130000 Decision 350000 No Drilling #NAME? 0 0.0% -30000 20.0% Find oil 800,000.00 Do Drilling #NAME? Chance (100,000.00) 30000 No oil Reserve 80.0% 0 Decision 30000 No Drilling #NAME? 0 0.0% -30000 0.0% 670000 0.0% -130000 to be worth $800,000; however, the company would have to pay $100,000 in drilling seismic survey at the proposed drilling site. The probability of a favorable seismic