Module 2 HW - 14. For the completed decision tree in the...

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in black are those we enter. The monetary values in color are calculated automatically by Precision Tree. For this particular example, explain exactly how these latter values are calculated (remember the folding-back process) and what they represent. These include the blue values at the end nodes, the red values at the probability nodes, and the green values at the decision nodes. A. *Values Explained: Blue Values: The two values following each triangle end node (which is shown in the color blue) represent different calculations . The bottom calculation detonates the sum of all monetary values on branches leading to this end node. While the top value is the probability of getting to this end node when the optimal strategy is used. explains why many of these probabilities are 0; the optimal strategy would never lead to these end nodes. Red Values The chance node ( red circle) displays an uncertain or risky event. All the branches from the chance node represent all the possible (non-overlapping) outcomes of the event. Green Values The decision node is represented as the green square, which shows the decision that the maker of the decision tree faces. Branches from the decision node signify all available (non-overlapping) decision choices. 14. For the completed decision tree in the figure 7.9, the monetary values
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site and the option for future development. This option, if exercised, is worth an additional $1,800,000 to the landowner, but this will occur only if natural gas is discovered during the exploration phase. The landowner, believing that the energy company’s interest in the site is a good indication that gas is present, is tempted to develop the field herself. To do so, she must contract with local experts in natural gas exploration and development. The initial cost for such a contract is $300,000, which is lost forever if no gas is found on the site. If gas is discovered, however, the landowner expects to earn a net profit of $6,000,000. Finally, the landowner estimates the probability of finding gas on this site to be 60%.
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Module 2 HW - 14. For the completed decision tree in the...

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