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....

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 by susu36

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justaguide | College Teacher | (Level 2) Distinguished Educator

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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.

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