# Question

The company in Exercises 14, 22, and 24 could send a team to Saudi Arabia to obtain additional information about the probabilities that oil will increase or decrease in price. They hope that the fact-finding trip would choose between the two alternatives considered in Exercise 22, or they could just estimate that the probabilities are equal.

In exercise 14

An investment bank is thinking of investing in a start-up alternative energy company. They can become a major investor for $6M, a moderate investor for $3M, or a small investor for $1.5M. The worth of their investment in 12 months will depend on how the price of oil behaves between then and now. A financial analyst produces the following payoff table with the net worth of their investment (predicted worth - initial investment) as the payoff.

In exercise 14, same 22, and 24

a) Make a decision tree for these decisions.

b) Should the company send the fact-finding trip? Explain.

c) The company’s experts estimate that if they send the fact-finding mission, there’s a 70% chance that they’ll conclude there’s a 0.4 probability of higher oil prices. What would the value of the additional information be to the company?

In exercise 14

An investment bank is thinking of investing in a start-up alternative energy company. They can become a major investor for $6M, a moderate investor for $3M, or a small investor for $1.5M. The worth of their investment in 12 months will depend on how the price of oil behaves between then and now. A financial analyst produces the following payoff table with the net worth of their investment (predicted worth - initial investment) as the payoff.

In exercise 14, same 22, and 24

a) Make a decision tree for these decisions.

b) Should the company send the fact-finding trip? Explain.

c) The company’s experts estimate that if they send the fact-finding mission, there’s a 70% chance that they’ll conclude there’s a 0.4 probability of higher oil prices. What would the value of the additional information be to the company?

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