Question

After careful 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​ (probability .4​) and lose ​$4 million if not​ (probability .6​); site B will net ​$60 million if successful​ (probability .3​) and lose ​$8 million if not​ (probability .7​).

Which site should the company choose according to the expected return from each​ site?

Answer 1

Expected return for site A = $9.6 million

Expected return for site B = $12.4 million

according to the above results the company should choose SITE B because it has higher Expected return

Explanation:

Given;

For site A,

Site A net if successful = $30 million

Success probability = 0.4

Site A loss if not successful= -$4 million

Probability of not successful = 0.6

For site B.

Site B net if successful = $60 million

Success probability = 0.3

Site B loss if not successful= -$8 million

Probability of not successful = 0.7

To estimate the expected return on an event with outcomes X1 and X2 with probabilities p1 and p2

E = X1(p1) + X2(p2)

Substituting for site A

E = 30(0.4) - 4(0.6)

E = $9.6 million

Substituting for site B

E = 60(0.3) - 8(0.7)

E = $12.4 million

Therefore, according to the above results the company should choose site B because it has higher Expected return