Southern Gas Company (SGC) is preparing to make a bid for oil and gas leasing rights in a newly opened drilling area in the Gulf of Mexico. SGC is trying to decide whether to place a high bid of $16 million or a low bid of $7 million. SGC, expects to be bidding against its major competitor Western Gas Corporation (WGC) and predicts WGC to place a bid of $10 million with a probability of 0.4 or a bid of $6 million with probability 0.6. Geological data collected at the drilling site indicates a 0.15 probability of the reserves at the site being large, a 0.35 probability of being average, and a 0.5 probability of being unusable. A large or average reserve would most likely represent a net asset value of $120 million or $28 million, respectively, after all drilling and extraction costs are paid. The company that wins the bid will drill an exploration well at the site for a cost of $5 million.
a. Develop a decision tree for this problem. Draw this tree by hand and include it along with your submission.
• Do not put any numbers (probabilities, costs, etc.) on your drawing.
Save your time - order a paper!
Get your paper written from scratch within the tight deadline. Our service is a reliable solution to all your troubles. Place an order on any task and we will take care of it. You won’t have to worry about the quality and deadlinesOrder Paper Now
• The tree should show the structure and logic of the decision process.
• Distinguishing between decision and chance nodes, and naming the various nodes and branches, is critical.
• Create a tree that is as general as possible – do not eliminate certain branches from consideration because of the specific values of the inputs as presented in the case.
• Recall that the key to success is determining what decision/event happens first, and then building out the tree in sequential order.
b. Implement your Decision Tree in Precision Tree. Then print out your solved decision tree on a single page and attach it as a part of your submission.
c. What is the optimal decision according to the EMV criterion?
d. Perform one-way sensitivity analysis showing how the optimal decision would change if the probability of WGC bidding $10 million varies from 0% to 100% in steps of 10%. Attach the Sensitivity Graph and Strategy Region with your submission.