After careful testing and analysis an oil company is conside

After careful testing and analysis, an oil company is considering drilling in two different sites. It is estimated that site A will net $2020 million if successful (probability .33) and lose $44 million if not (probability .77); site B will net $7070 million if successful (probability .22) and lose $66 million if not (probability .88). Which site should the company choose according to the expected return from each site?

Solution

General equation:

E($) = p(gain)*gain + p(lose)*loss

site A : E = 2020*0.33 + 0.77*(-44) = $ 632.72 million

site B : E = 7070(0.22) - 66*(0.88) = $ 1497.32 million