A company owns a lease granting it the right to explore for oil on certain property. It may sell the lease for $75,000, or it may drill the oil. The four possible drilling outcomes are listed below, together with probabilities of occurrence and dollar consequences:
Possible Outcome Prob. Consequences ($ thousands)
Dry Well 0.16 ($500)
Gas well only 0.40 $250
Oil and gas
combination 0.24 $500
Oil well 0.20 $1,000
Draw a decision tree for this problem, and compute the expected monetary value for the act "drill". Should the company drill or sell the lease?
I have many problems similar to this one and missed the class where the step by step instruction occurred. I am looking for help in the steps necessary to solve a problem such as this one.
First step here is how many stages are there. In this case there is ...
First step here is how many stages are there. In this case there is only one stage. In cases of multistage total outcome related to all stages is calculated and summed and decision having highest outcome value will be adopted
The decision analysis document is as attached.