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....

Topic:

Math

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.

Asked on

1 Answer | Add Yours

justaguide's profile pic

Posted on

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.

We’ve answered 301,103 questions. We can answer yours, too.

Ask a question