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Decision Tree using Palisade Precision Tree

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The senior executives of an oil company are trying to decide whether or not to drill for oil in a particular field in the Gulf of Mexico. It costs the company $300,000 to drill in the selected field. Company executives believe that if oil is found in this field its estimated value will be $1,800,000. At present, this oil company believes there is a 48% chance that the selected field actually contains oil. Before drilling, the company can hire a geologist at a cost of $30,000 to prepare a report that contains a recommendation regarding drilling in the selected field. There is a 55% chance that the geologist will issue a favorable recommendation and a 45% chance that the geologist will issue an unfavorable recommendation. Based on the track record and prior accuracy of the geologist's recommendations we have the following information. Given a favorable recommendation from the geologist, there is a 75% chance that the field actually contains oil. Given an unfavorable recommendation from the geologist, there is a 15% chance that the field actually contains oil.
This oil company wishes to maximize its expected net earnings.

(a) Structure the oil company's problem as a decision tree.

(b) Implement your tree using Precision Tree. Submit your Precision Tree implementation.

(c) What is your recommended decision strategy? What is the expected monetary value (EVM) associated with the optimal decision strategy.

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Solution Summary

The solution shows a detailed Decision Tree in EXCEL and includes calculations of all expected monetary values.

Solution provided by:
Anwesha Ghosh, MSc
Education
  • MSc, Osmania University
  • MSc, Indian Institute of Technology - Roorkee (I.I.T.-ROORKEE)
  • BSc, Banaras Hindu University
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