Oil%20Example - EWMBA 201a In-class Exercise: Real Options...

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EWMBA 201a Page 1 In-class Exercise: Real Options On the back of this page, there is a decision tree for the Anadarko oil extraction example we’ve gone through thus far. Flip the page over and solve the tree for an expected value maximizer. Then, talk to your neighbor about the following questions: 1. What’s the value of acquiring information about the site before deciding which technology to use? In other words, in this example, Anadarko doesn’t have to pay to acquire information about whether the site is mediocre, OK or great, but up to how much should they be willing to pay to acquire that information? 2. What’s the value of the site? Compare the value you’ve arrived at using the decision tree with the value according to the simple NPV calculations we’ve gone through. What’s the difference?
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Oil%20Example - EWMBA 201a In-class Exercise: Real Options...

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