Oil Smart Refinery company is trying to decide whether or not to drill oil in Turkana next
Question:
Oil Smart Refinery company is trying to decide whether or not to drill oil in Turkana next month. The chief engineer has made the following estimate from past experience.
P(Oil) = 0.2
P(no oil)=0.8
It is possible for the company to hire a firm of international consultants to carry out a survey of the site.
The company has estimated that if there is oil then there is a 95% chance that the report will be favourable, and if there is no oil there is a 10% chance that the report will be favourable.
The cost of drilling
= Sh. 10 million
Value of benefit if oil is found = Sh.70 million
Cost of information
= Sh.3 million
Required:
(i) Advice the company on whether to hire the consultant using decision trees approach.
(ii) Compute the value of sample (imperfect) information.
(15 Marks)