(1) Mobon Oil Company owns a lease that entitles it to explore for oil on a parcel of offshore land in California. Since the lease is about to expire, Mobon must now decide whether to drill for oil at the site or to sell the lease to Exxil Oil Company, which has offered Mobon $50,000. Mobon estimates that it would cost $100,000 to drill at the site. If the well were dry, all this cost would be lost. If the well were successful, its value to Mobon would depend on the extent of the oil discovered. For simplicity, Mobon assumes there are only two types of successful wells: a minor success and a major success. Mobon estimates that a minor success would result in revenues of $200,000 in excess of the drilling costs, whereas a major success would result in revenues of $600,000 in excess of the drilling cost. Mobon has assessed the following probabilities:

 

Reconsider Mobon’s decision problem in (1) above. 

(a) Assuming all other data remain unchanged, perform a sensitivity analysis on the amount Exxil offers to buy the lease. 

(b) Assuming all other data remain unchanged, perform a sensitivity analysis on Mobon’s estimate of the cost to drill for oil at the site. Use a graphical analysis within your answer. 

(c) Assuming all other data remain unchanged, perform a sensitivity analysis on Mobon’s estimate of the probability of a dry well (currently 0.70). Use a graphical analysis within your answer.

Answer rating: 100% (QA)

Part A Payoff matrix Decision Options State of Nature Dry well Drill Minor Succes... View the full answer