Homework Help

What site should the company choose according to the expected return for each site in...

user profile pic

susu36 | Student, Undergraduate | eNoter

Posted August 25, 2012 at 2:45 AM via web

dislike 2 like

What site should the company choose according to the expected return for each site in the following case:

After testing and analysis, an oil company is considering drilling in two different sites. It is estimated that site A will net $30 million if successful with probability 0.3 and lose $ 3 million if not; site B will net $ 60 million if successful with probability 0.12 and lose $ 4 million if not.

1 Answer | Add Yours

user profile pic

justaguide | College Teacher | (Level 2) Distinguished Educator

Posted August 25, 2012 at 2:58 AM (Answer #1)

dislike 1 like

According to the information provided, for site A the net gain is $30 million if successful with probability 0.3 and loss is $3 million if not.

The expected return here is 30*0.3 - 3*0.7 = 6.9 million

For site B the net gain is $60 million if successful with probability 0.12 and loss is $4 million if not.

The expected return is 60*0.12 - 4*(1 - 0.12) = 60*0.12 - 4*0.88 = 3.68 million

The expected returns are higher for site A and this should be chosen.

Join to answer this question

Join a community of thousands of dedicated teachers and students.

Join eNotes