1) Base on scenario given in table below, choose the best alternative. States of Nature Favorable market Unfavorable market (RM) (RM) Construct Large Plant 200,000 =180,000 Construct Small Plant 100,000 =20,000 Do Nothing 0 0 a) Maximax 'b) Maximin. ) Equally likely (Laplace) 4d) Minimax regret 2) Decision tree a) An oil company executive is evaluating a piece of land for drilling. Experience and previous ‘geological investigation show a 10% chance of finding oil in commercial quantity. Cost of drilling is estimated at £100,000, but if oll is found in commercial quantity, revenue expected is £750,000 (net present value). Construct the decision tree and recommend the course of action whether to Drill or to Abandon. b) Another alternative to drill or abandon, is to test. This involves spending £50,000 on an elaborated ‘geophysical survey. The probability of test turned out positive is 10%, and turned out negative is 90%. Past experience shows that if testing is positive there is a 90% chance there is oil in ‘commercial quantity. However, if testing is negative, then there is only 1% chance of finding oil in ‘commercial quantity. Extend the decision tree (from (a)) and give your recommendation.Solutions a) Maximax- choose the alternative with the maximum output States of Nature Favorable market Unfavorable market Maximax (RM) (RM) Construct Large Plant 200,000 =180,000 200,000 Construct Small Plant 100,000 20,000 100,000, Do Nothing O 0 0 b) Maximin- choose the al ternative with the maximum minimum output ‘States of Nature Favorable market Unfavorable market Maximin (RM) (RM) Construct Large Plant 200,000 =180,000 Construct Small Plant 100,000 =20,000 Do Nothing 0 oO c) Equally likely (Laplace) ~ Assume all states of natu ire to be equally likely, choose maximum EMV States of Nature Favorable market Unfavorable market Equally Likely (RM) (RM) Construct Large Plant 200,000 =180,000 10,000 ‘Construct Small Plant 100,000, =20,000 40,000 Do Nothing. 0 0 Probabilities 05 05 I 4) Minimax regret States of Nature Favorable market Unfavorable market MR (RM) (RM) Construct Large Plant 200,000 “180,000 Construct Small Plant 100,000 20,000 Do Nothing. 200,000 0 200,000 [ 05 05a eopapay a 51 v0 4%, 9 = 029K + vopuoay of ove's® - = 00'S = aot -caon g = a oy YPN 10 woriarg © = 00904 OSE § CONG ane Coen attny *C@N4 (ot )Mepwegy oF $1 wiktag 0 2 wnpuoay S-tb> = oO = CHINA. = Ng H or +0 vam = 257L Of 5) uosomp mp og OOSis2: 271S2 F845 -o¢- = soy Tas g *Oe 4 200 2 seiae $4 =C0X bb-0) +(051x lo-0) 0A gq st - = va ¥ 290N 10 voIsnrg MQ & uorymg O = wpuoay S45 = Condo) + ($LS*0-0) =CQ)nqz GS = 001-St9 » Hog © sow 10 woxnrg Oo =(f)ng GL9 2(OK10)4 (OSL b-0)= CN os. ) cy Te