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Using the same model developed for Oil Field C, consider the following extension. Drilling continues for years 3 and 4, during which production shrinks
Using the same model developed for Oil Field C, consider the following extension. Drilling continues for years 3 and 4, during which production shrinks to 300,000 and 100,000 barrels, respectively. Costs to drill in these later years is still assumed to be $13/barrel. Assume the following evolution in prices in these later years. Price level of year 3 will depend on year 2 price. The year 3 price will increase by 20%, stay at the same level, or decrease by 25%. Price level of year 4 will depend on year 3 price. The year 4 price will increase by 20%, stay at the same level, or decrease by 25%. The probabilities for price increases, no change, and price decreases are 0.25, 0.50 and 0.25, respectively. Find the expected value of this project. Is it still optimal to drill? Provide a copy of your decision tree pane, policy tree, and node definitions.
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