154 Financial Management
- On the basis of the above information, the alternatives selected at the decision
points D 2 , D 3 and D 4 are D 2 (do not drill), D 31 (drill), and D 41 (drill) respectively.
The values assigned to the decision points D 2 , D 31 and D 4 are 0, Rs. 0.367
million, and Rs. 1.513 million respectively. - Proceeding leftward the expected monetary value at chance fork C 2 is calcu-
lated
Expected monetary value at C 2.
= 0.4 ◊ b + 0.3 ◊ 3.67 + 0.3 + 15.13
= Rs. 0.564 million - Moving leftwards the first-state decision point is reached. The alternatives and
their expected monetary values, at this decision point, are:
Alternatives Expected Monetary Value (Rs. in million)
D 11 (Drill) 0.5
D 12 (conduct seismic experiments) 0.544
D 13 (Do Nothing) 0
Looking at the expected monetary values as find that D 12 (conduct seismic experiments)
is the most desirable alternative at the first stage decision point.
Figure 6.16 shows the decision tree with expected values at chance points and decision
points.
Based on the above evaluation of alternatives we find that the optimal decision strategy
is as follows:
Choose D 12 (conduct seismic experiment) at decision point D 1 and wait for the outcome
at chance point C 2. If the outcome at C 2 is C 21 (no structure), then choose C 22 (do not
drill); if the outcome at C 2 is C 22 (open structure), then choose D 31 (drill), if the
outcome at C 2 is C 23 (closed structure), then choose D 41 (drill).