You work for a large international oil company searching for oil off the coast ofAustralia, not too far from Melbourne. Your firm has acquired drillingrights, and you are contemplating yourfirm's options. The estimated drilling cost is$40 million. Forsimplicity, assume that if you drill at thissite, there are two possibleoutcomes: either there is oil at the site or there is no oil. Based on the availabledata, your geologists assign a20% chance that there is oil at the site(the site iswet). If there isoil, your geologists believe that the expected present value of a well in this location is$160 million. If there is no oil(the site isdry), assume that the value of the drilled site is$0.

Although you cannot resolve all the uncertainty about whether the site containsoil, you can gather some information. Inparticular, you can do seismic testing. In thisprocedure, one sets off explosives on the ocean floor and measures the seismic waves at other points on the ocean floor. From the seismicdata, one can construct a 3D image of the subsurface geology and see if there are structures that may form an oil reservoir. Your geologists estimate that most(90%) of the wet sites have structures that can be detected by this seismic test. However many(60%) of the dry sites also have these structures.

c) The seismic test costs$2.5 million. Do you want to do thetest? Explain why or why not. A.Yes, the EV with this information is 2.6($million), so it is ok to pay 2.5($million) for the test.B.Yes, because with more information she can make a better decisionC.No, the EV with this information is 2.2($million), so you do not want to pay 2.5($million) for the test.D.No, the EV with this information is 2.4($million), so you do not want to pay 2.5($million) for the test. d) How does EV of doing the seismic test first change aswet probabilitychanges? If the probability of"wet" is below 0.2 the EV is 0. Afterthat, the EV increases as the probability A.decreasesB.increases