1. Decision trees Look back at

1. Decision trees Look back at the Vegetron electric mop project in Section 9-4. Assume that if tests fail and Vegetron continues to go ahead with the project, the $1 million investment would generate only $75,000 a year. Display Vegetron’s problem as a decision tree.

2. Decision trees Your midrange guess as to the amount of oil in a prospective field is 10 million barrels, but there is a 50% chance that the amount of oil is 15 million barrels and a 50% chance of 5 million barrels. If the actual amount of oil is 15 million barrels, the present value of the cash flows from drilling will be $8 million. If the amount is only 5 million barrels, the present value will be only $2 million. It costs $3 million to drill the well. Suppose that a seismic test costing $100,000 can immediately verify the amount of oil under the ground. Is it worth paying for the test? Use a decision tree to justify your answer.

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