Please construct a Decision tree and carefully document the results of your analysis. A major offshore...

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Please construct a Decision tree and carefully document the results of your analysis. A major offshore oil drilling firm is considering three different approaches when managing its oil platform operations. It can take a "standard" middle-of-the-road approach, closely following accepted safety practices of other firms in the industry. Alternatively, it can take an "ultraconservative" approach to safety, implementing extensive training of personnel, allowing for generous margins of error, closely monitoring drilling operations, and formulating backup systems and contingency plans in the event of a dangerous occurrence on its offshore platform. Finally, it can take a lax approach to safety while pushing the rate of extraction to the limit. Consider an oil drilling site that is expected to yield $2 billion in profit over its economic life, if no unforeseen disasters or spills occur. By following standard safety practices, the driller can limit the risk of a disastrous spill to a 1 percent probability. The cost of adopting standard safety practices (in terms of time and money) at the site is $160 million. Instead, adopting an ultraconservative approach (at a cost of $240 million) would reduce the disaster risk to .5 percent. Finally, a lax safety approach costs only $40 million and implies a disaster risk of 3 percent. If a disaster were to occur, the best estimate of the ultimate cost is $10 billion. This expected- value estimate considers a range of costs-from the tens of millions if an oil spill is immediately plugged by emergency measures to as high as $40 billion in the worst-case scenario. Of the three operating options, which is most profitable? Equivalently, which has the lowest net expected cost? How would the driller's operating choice change if, because of wishful thinking, it (wrongly) believed that its lenient safety policy implied only a 2 percent disaster risk? Or if it believed that its expected disaster cost would be $5 billion (instead of $10 billion)? Please construct a Decision tree and carefully document the results of your analysis. A major offshore oil drilling firm is considering three different approaches when managing its oil platform operations. It can take a "standard" middle-of-the-road approach, closely following accepted safety practices of other firms in the industry. Alternatively, it can take an "ultraconservative" approach to safety, implementing extensive training of personnel, allowing for generous margins of error, closely monitoring drilling operations, and formulating backup systems and contingency plans in the event of a dangerous occurrence on its offshore platform. Finally, it can take a lax approach to safety while pushing the rate of extraction to the limit. Consider an oil drilling site that is expected to yield $2 billion in profit over its economic life, if no unforeseen disasters or spills occur. By following standard safety practices, the driller can limit the risk of a disastrous spill to a 1 percent probability. The cost of adopting standard safety practices (in terms of time and money) at the site is $160 million. Instead, adopting an ultraconservative approach (at a cost of $240 million) would reduce the disaster risk to .5 percent. Finally, a lax safety approach costs only $40 million and implies a disaster risk of 3 percent. If a disaster were to occur, the best estimate of the ultimate cost is $10 billion. This expected- value estimate considers a range of costs-from the tens of millions if an oil spill is immediately plugged by emergency measures to as high as $40 billion in the worst-case scenario. Of the three operating options, which is most profitable? Equivalently, which has the lowest net expected cost? How would the driller's operating choice change if, because of wishful thinking, it (wrongly) believed that its lenient safety policy implied only a 2 percent disaster risk? Or if it believed that its expected disaster cost would be $5 billion (instead of $10 billion)?

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Lets begin by constructing a decision tree and analyzing each of the three safety approaches to determine the expected cost for each We are given the ... View the full answer