Weber State Decision Trees Analysis Assignment Project

Weber State Decision Trees Analysis Assignment Project

Table of Contents

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Instructions

Weber State Decision Trees Analysis Assignment Project

I’m working on a business question and need an explanation and answer to help me learn.

Decision Trees

You have an option to develop an oil field, which has known reserves of 50,000 barrels. Production costs are $30 per barrel. You may drill the oil in the first year or in the second year, but you must recover all 50,000 barrels at the same time. If you drill in the first period, you may sell the oil at the period one price or store it at a cost of $2 per barrel. You pay storage costs at the time you decide to store the oil.

The current price of oil is $40 per barrel, but the price will increase by 20 percent or decrease by 10 percent each year with equal probability. (So, for example, the price per barrel the first year will be either $48 per barrel or $36 per barrel.)

Construct a decision tree to show all the possible outcomes over the two years and the net income for each outcome. Assume that you must make the decision to drill or not to drill in period one before observing the period one price. If you drill in period one, you must decide to sell or store before observing period two price. If you do not drill in period one, you make the decision whether or not to drill in period two after observing the period one price, but before observing the period two price.

 

If the discount rate is 10 percent per year, what is the best action to take in each period? What is the expected NPV of the oil concession at time zero (i.e., before the price change in the first period)?

There is a spreadsheet attached that you may use as a guide in solving this problem.

Scenario Analysis

Weber State Decision Trees Analysis Assignment Project

Suppose in the above problem that each year there is a 50 percent probability that the price will increase by 30 percent and a 50 percent probability that the price will not change. How do the above answers change?

Now suppose in the above problem that each year there is a 50 percent probability that the price will increase by 10 percent and a 50 percent probability that the price will decrease by 30 percent. How do the above answers change?

Just need some help setting up and answering this question please. I have an attached file as well to help you out if need be. Thank you.

Weber State Decision Trees Analysis Assignment Project

RUBRIC
Excellent Quality 95-100%	Introduction 45-41 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.		Literature Support 91-84  points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.			Methodology 58-53 points Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met.
Average Score 50-85%	40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided.		83-76  points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration.			52-49  points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met.
Poor Quality 0-45%	37-1 points The background and/or significance are missing. No search history information is provided.		75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration.			48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met
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