A large multinational oil company is considering its strategy in the North See. The UKgovernment has announced that a new drilling site in the North Sea will be offered for sale on acompetitive tender basis, the site going to the company making the highest bid. Provisionalexploration of the site indicates that, over its life, it can be expected to generate revenue ofaround £1,500 million if the oil reserves turn out to be high, but only £500 million if they turnout to be low. Seismic tests have indicated that the probability of high reserves is 0.60. If thecompany is successful in its bid, it will also have to decide whether to construct a new oil rig forthe site or to move an existing oil rig which is currently operating at an uneconomic site. Thecosts of the new rig are around £250 million and for moving the existing rig around £100 million.A new rig would be able to boost production by £150 million if reserve levels turned out to behigh. The company has decided that if it is to bid for the site, the maximum bid it can afford atpresent, because of its cash flow situation, is £750 million. In the past, 70 percent of thecompany's bids for such sites have been successful. However, the company is also underpressure to refurbish some of its existing rigs for both efficiency and safety reasons. The £750million could be used for this purpose instead. If the money is used for refurbishment, there is a50 percent chance of increasing efficiency to generate a return on the £750 million of 5 percent,and a 50 percent chance of generating a return of 10 percent. If the decision to refurbish takesplace after the bid has been made and failed, another £500 million will be required forrefurbishment.a) Construct a decision tree for this problem.

A decision tree helps to analyze various alternatives available in a graphical/diagrammatical manner…

Answered: company's bids for such sites have been…

Purchasing and Supply Chain Management

6th Edition

ISBN:9781285869681

Author:Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. Patterson

Publisher:Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. Patterson

ChapterC: Cases

Section: Chapter Questions

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