A company is considering drilling a well. In the past, only 70% of wells drilled were successful at 200 metres depth in that area. Moreover, on finding no water at 200 meters, some persons in that area drilled it further up to 250 meters but only 20% struck water at that level. The prevailing cost of drilling is Rs. 500 per metre. The company manager estimated that in case he does not get water in his own well, he will have to pay Rs. 1,50,000 to buy water from outside for the same period of getting water from the well. Draw a decision tree and determine the optimal strategy for the company.
A company is considering drilling a well. In the past, only 70% of wells drilled were successful at 200 metres depth in that area. Moreover, on finding no water at 200 meters, some persons in that area drilled it further up to 250 meters but only 20% struck water at that level. The prevailing cost of drilling is Rs. 500 per metre. The company manager estimated that in case he does not get water in his own well, he will have to pay Rs. 1,50,000 to buy water from outside for the same period of getting water from the well. Draw a decision tree and determine the optimal strategy for the company.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A company is considering drilling a well. In the past, only 70% of wells drilled were successful at 200 metres depth in that area. Moreover, on finding no water at 200 meters, some persons in that area drilled it further up to 250 meters but only 20% struck water at that level. The prevailing cost of drilling is Rs. 500 per metre. The company manager estimated that in case he does not get water in his own well, he will have to pay Rs. 1,50,000 to buy water from outside for the same period of getting water from the well. Draw a decision tree and determine the optimal strategy for the company.
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