Untitled-29

152 Financial Management

C 11

C 1

Dry

C 12

Wet

C 13

C 4

C 5

C 3

C 21

Drill

D 22

Do not drill

D 2

C 21

Drill

D 32

Do not drill

D 3

C 41

Drill

D 42

Do not drill

D 4

Soaking

C 22

D 1 C (^2) Open
D 12
Conduct
Siesmic
No structureC^21
Closed structure
C 31
Dry
C 32
Wet
C 33
Soaking
C 41
Dry
C 42
Wet
C 43
Soaking
C 51
Dry
C 52
Wet
C 53
Soaking
C^23
D 12
Do nothing
Figure 6.14: Decision Tree
Monetary Values of Outcomes The net present value of cash flows, calculated at 12
per cent discount rate, associated with the three states for five years (which is the
maximum duration of oil drilling) is given below:
State Net present value (Rs. in million)
Dry -0.6
Wet 0.8
Soaking 2.4
Exhibit 6.15 shows the decision tree incorporating information regarding probabilities
and monetary values of outcomes discussed above. With this decision tree we evaluate
the alternative courses of action as follows: