Problem:
A company owns a lease granting it the right to explore for oil on certain property. It may sell the lease for $75,000, or it may drill the oil. The four possible drilling outcomes are listed below, together with probabilities of occurrence and dollar consequences:
Possible Outcome Prob. Consequences ($ thousands)
Dry Well 0.16 ($500)
Gas well only 0.40 $250
Oil and gas
combination 0.24 $500
Oil well 0.20 $1,000
Draw a decision tree for this problem, and compute the expected monetary value for the act "drill". Should the company drill or sell the lease?