Homework SourseDecision analysis After careful testing and analysis an oil
Decision analysis. After careful testing and analysis, an oil company is considering drilling in two different sites. It is estimated that site A will net $20 million if successful (probability .4) and lose $2 million if not (probability .6); site B will net $60 million if successful (probability.3) and lose $8 million if not (probability .7). Which site should the company choose according to the expected return from each site?
A. What is the expected return for site A? million
A. What is the expected return for site A? million
Solution
For this we calculate the net expectation from both sites. For site A: Profit if successful = $20 million; probability = 0.4 Profit if unsuccessful = -$2 million; probability = 0.6 So net expected profit = 20*0.4 - 2*0.6 = $6.8 million For site B: Profit if successful = $60 million; probability = 0.3 Profit if unsuccessful = -$8 million; probability = 0.7 So net expected profit = 60*0.3 - 8*0.7 = $12.4 million So net expectation is more for B. Hence the company should choose site B The expected return for site A is $6.8 million
