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Answer: Q: No oil co.75 ) Drill for oil oil (0:25) $ 900000 sell the track $90000 Expected value = Sprobability x pay off For brill for oil Expected value = 0.75 40+0.25X900000 =$225000 Investment = $ 100 000 Net probit $225.000-$100000 $125000 Nel- pootit for sell the track = $90000
since net probit of drill for oil is higher, therefore best decision is to drill for oil. $0 b. No oil 0.85) oil (0.15) Drill for oil $ 900000 sell the tract $ 90000 Expected value = E poobability x payoff For Doill for oil Expected value 0.85 X0 +0.15 X 900000 $135000 drivestment $ 100 000 Net probit = $135000 - $100000 $ 35000
Net probit for sell the tract = $90.000 Since net poobit of sell the tract is higher, there bore best decision is tos Sell the tract.
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