An organization has three potential sites where it can build a drilling rig. Due to its past
Question:
An organization has three potential sites where it can build a drilling rig. Due to its past experience, the CEO has instructed his management team to choose no more than one site.
The costs, the revenues and the estimated outcomes for each site are given in the table below.
Probabilities for the different outcomes | ||||
E3 (Dry) Expected revenue: $0 | E2 (Wet) Expected revenue: 5$M | E1 (Overflowing) Expected revenue: 30$M | Costs (in million $) | Site |
0.2 | 0.8 | 0 | 2 | A |
0.2 | 0.5 | 0.3 | 8 | B |
0.4 | 0.4 | 0.2 | 6 | C |
A) How much would the company be willing to pay for perfect information on all three sites (together)? Note that after finding out the true nature of each site, the company can still choose no more than one site.
B) After a close vote, the company decided not to drill in sites A and B. It was also decided that site C would be chosen only if it were profitable to drill there. In addition, the company’s CEO determined that site C could not be overflowing (state E1). Assuming that is true, how much would the company be willing to pay for perfect information on site C now?
Expert Answer:
SOLUTION A The companys decision regarding which site to choose depends on the expected value of eac... View the full answer
