Sam Parkington has a nontransferable option to mine for gold on a certain piece of land. He has three choices of action:
a. He can start mining immediately.
b. He can conduct further tests to see whether there is a good promise of finding gold.
c. He can drop the option.
The cost of the test would be $45,000, and the cost of mining would be $150,000. If he finds gold, he expects to net $600,000.
He estimates the following probabilities. If he starts mining without further tests, he estimates that the probability of finding gold is 55 percent. He expects that the probability of the test being successful is 60 percent. If the test is favorable, the probability is 85 percent that there is gold in the ground, but if the test is not favorable it is only 10 percent. Using a decision tree, make a recommendation