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Quiz7AKey - OMM 230 Quiz 7A(Key The SHELLY COMPANY owns a...

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OMM 230 Quiz 7A (Key) The SHELLY COMPANY owns a tract of land that may contain oil. A consulting geologist  has reported to management that she believes there is 1 chance in 4 chance (i.e., 25%) of  oil.  Because of this prospect, another oil company has offered to purchase the land for $90,000.  However, SHELLY is considering holding the land in order to drill for oil itself. The cost of  drilling is $100,000. If oil is found, the resulting expected revenue will be $800,000. So the  company’s expected profit (after deducting the cost of drilling) will be $700,000. A loss of  $100,000 (the drilling cost) will be incurred if the land is dry (no oil).The following table  summarizes these data.  Alternatives Payoffs for different status of land (or State of  Nature)                                        Oil Dry Drill for oil $700,000 -$100,000 Sell the land $90,000 $90,000
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