Suny Ltd. is a gas provider in Chicago. Mrs. Larry is a landowner of a site that the company is… 1 answer below »

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1. Suny Ltd. is a gas provider in Chicago. Mrs. Larry is a landowner of a site that the company is interested to explore. Suny Ltd. offers Mrs. Larry a deal of $200,000 for the exploration rights to natural gas on the site and the option for future development. If natural gas is discovered on the site and Suny Ltd. wishes to develop the site further, then Mrs. Larry will be paid an additional $1,900,000. Mrs. Larry believes that Suny Ltd.’s interest in the site gives rise to the chance that gas is present. So, Mrs. Larry may opt to develop the field independently. Mrs. Larry may sign a contract with Drillers & Co – an expert in natural gas exploration and development, which will cost $250,000 regardless of whether gas is found on the site or not. If gas was discovered, however, Mrs. Larry may earn a net profit of $6,000,000 from the site. Mrs. Larry believes that the probability of finding gas on the site is 65%. Evaluate the follow; a. Construct a decision tree to describe the decision situation of Mrs Larry. Explain the logic of the tree with the right notations. b. Define and describe the monetary outcomes in the decision tree. c. Solve the decision tree to identify the strategy that maximizes Mrs. Larry’s expected net earnings. d. Develop at least 5 alternative scenarios by varying each of the inputs one at a time within the range of plus or minus 20% from their base values.


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