Untitled-29

Capital Budgeting under Risk and Uncertainties^153

Figure 6.15: Decision Tree

1. Starting at the right-hand end of the tree, the expected monetary values (EMVs)
   at chance forks C 1 , C 3 , C 4 and C 5 , which come first at we proceed leftwards,
   are determined:
   EVM (C 1 ) = Rs. 0.5 million EMV (C 3 ) = Rs. ñ0.16 million
   EMV (C 4 ) = Rs. 0.367 million EMV (C 5 ) = Rs. 1.513 million


2. Given the expected monetary values the alternatives at the last stage decision
   points and their expected monetary values are defined as follows:
   Decision point Alternatives Expected monetary value
   (Rs. in million)
   D 2 D 21 (Drill) -0.16
   D 22 (Do not Drill) 0
   D 31 (Drill) 0.367
   D 3 D 32 (Do not Drill) 0
   D 41 (Drill) 1.513
   D 4 D 42 (Do not Drill) 0

C Rs. in million

11 (Dry)

C 1

p = 1/2

C 12 (Wet)

-0.6

p = 1/4 -0.8

C 13 (Soaking) -2.4

C 11 (Dry)

p = 1/2

C 12 (Wet)

-0.6

p = 1/4 -0.8

C 13 (Soaking) -2.4

C 41 (Dry)

p = 1/2

C 42 (Wet)

-0.6

p = 1/3 -0.8

C 43 (Soaking) -2.4

C 51 (Dry)

p = 1/10

C 52 (Wet)

-0.6

p = 11/30 -0.8

C 53 (Soaking) -2.4

C 4

C 5

C 31 (Dry)

p = 4/6

C 32 (Wet)

-0.6

p = 1/10 -0.8

C 33 (Soaking) -2.4

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

p = 1/4

p = 1/10

0

p = 1/6

0

p = 16/30

0

C 22 (Open

structure)

p = 3/10

D 1 DConduct^32 C 2

Siesmic

experiments

D 11

Drill

D 12

Do nothing^0

p =

1/10

C^21

(No structure)

C^23

(Closed structure)