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
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 320,053 questions. We can answer yours, too.Ask a question