Shamrock Oil owns a parcel of land that has the potential to be an underground oil field. It will cost $550,000 to drill for oil. If oil does exist on the land, Shamrock will realize a payoff of $3,000,000 (not including drilling costs). With current information, Shamrock estimates that there is a 0.3 probability that oil is present on the site. Shamrock also has the option of selling the land as is for $300,000, without further information about the likelihood of oil being present. A third option is to perform geological tests at the site, which would cost $150,000. There is a 30% chance that the test results will be positive, after which Shamrock can sell the land for $550,000 or drill the land, with a 0.70 probability that oil exists. If the test results are negative, Shamrock can sell the land for $60,000 or drill the land, with a 0.05 probability that oil exists. Using a decision tree, recommend a course of action for Shamrock Oil. Choose the correct decision tree that corresponds to the options of Shamrock Oil. Note that all payoffs are in thousands of dollars. A. Sell Land $300 Sell Land Q $400 D Positive 0.3 Oil 0.70 $2,300 Drill Land Test Land Dry 0.30 - $700 Sell Land -$90 Negative Oil Oil 0.7 $2,300 0.05 $2,450 0.3 Drill Land Drill Land ○ C. Dry 0.7 -$550 Positive 0.3 Dry 0.95 - $700 Sell Land $400 1 Oil 0.70 $2,450 Drill Land B. Sell Land $300 Sell Land $400 Positive 0.3 Oil 0.70 $2,300 Drill Land Test Land Drill Land ○ D. Dry 0.30 - $700 Sell Land - $90 Negative Oil 0.7 $2,450 Oil 0.05 $2,300 0.3 Drill Land Dry 0.7 -$550 Dry 0.95 - $700 Sell Land $300 Sell Land $400 Positive 0.3 Oil $2,450 0.05 Drill Land Test Land Dry 0.30 -$550 Sell Land $90 Test Land Dry $550 0.95 Sell Land $90 Negative Negative Oil Oil $2,450 $2.450 Oil 0,7 $2,300 0.3. 0.05 Drill Land Oil 0.7 $2,300 0.3 0.70 Drill Land Drill Land Drill Land Dry 0.7 -$700 Dry 0.95 $550 Dry 0.7 - $700 Dry 0.30 -$550 What is the best course of action for Shamrock Oil? A. Test the land. If the test is positive, sell the land. If the test is negative, drill the land. OB. Test the land. If the test is positive, drill the land. If the test is negative, sell the land. OC. Sell the land without any investigations. OD. Drill the land without any investigations. The expected payoff is $1481 (enter your response as a whole number). Q

Shamrock Oil owns a parcel of land that has the potential to be an underground oil field. It will cost $550,000 to drill for oil. If oil does exist on the land, Shamrock will realize a payoff of $3,000,000 (not including drilling costs). With current information, Shamrock estimates that there is a 0.3 probability that oil is present on the site. Shamrock also has the option of selling the land as is for $300,000, without further information about the likelihood of oil being present. A third option is to perform geological tests at the site, which would cost $150,000. There is a 30% chance that the test results will be positive, after which Shamrock can sell the land for $550,000 or drill the land, with a 0.70 probability that oil exists. If the test results are negative, Shamrock can sell the land for $60,000 or drill the land, with a 0.05 probability that oil exists. Using a decision tree, recommend a course of action for Shamrock Oil. Choose the correct decision tree that corresponds to the options of Shamrock Oil. Note that all payoffs are in thousands of dollars. A. Sell Land $300 Sell Land Q $400 D Positive 0.3 Oil 0.70 $2,300 Drill Land Test Land Dry 0.30 - $700 Sell Land -$90 Negative Oil Oil 0.7 $2,300 0.05 $2,450 0.3 Drill Land Drill Land ○ C. Dry 0.7 -$550 Positive 0.3 Dry 0.95 - $700 Sell Land $400 1 Oil 0.70 $2,450 Drill Land B. Sell Land $300 Sell Land $400 Positive 0.3 Oil 0.70 $2,300 Drill Land Test Land Drill Land ○ D. Dry 0.30 - $700 Sell Land - $90 Negative Oil 0.7 $2,450 Oil 0.05 $2,300 0.3 Drill Land Dry 0.7 -$550 Dry 0.95 - $700 Sell Land $300 Sell Land $400 Positive 0.3 Oil $2,450 0.05 Drill Land Test Land Dry 0.30 -$550 Sell Land $90 Test Land Dry $550 0.95 Sell Land $90 Negative Negative Oil Oil $2,450 $2.450 Oil 0,7 $2,300 0.3. 0.05 Drill Land Oil 0.7 $2,300 0.3 0.70 Drill Land Drill Land Drill Land Dry 0.7 -$700 Dry 0.95 $550 Dry 0.7 - $700 Dry 0.30 -$550 What is the best course of action for Shamrock Oil? A. Test the land. If the test is positive, sell the land. If the test is negative, drill the land. OB. Test the land. If the test is positive, drill the land. If the test is negative, sell the land. OC. Sell the land without any investigations. OD. Drill the land without any investigations. The expected payoff is $1481 (enter your response as a whole number). Q

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 12P: After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide...

See similar textbooks