Human Drilling Contractors is considering drilling for oil in the Kavango region. The probability of finding oil is dependent on whether or not an initial exploration study is undertaken. If no study is undertaken, and the company decides to drill, there is a 12% chance that oil will be discovered, generating a total income of N$50 million. The cost of drilling will be N$8 million. If a study is undertaken at a cost of N$200 000, there is a 10% chance that the study will be favourable. Should the study show favourable results, the probability of finding oil is 95%. The total income generated from the discovery of oil is N$50 million at an N$8 million cost of drilling. If the study is undertaken, and the results show a low likelihood of oil existing, the company may choose to drill, but the probability of discovering oil is 5%.
a) Using a decision tree, advise the company on what course of action it should take. (21 marks)
b)Highlight any two (2) advantages and two (2) disadvantages of a decision tree