Question

UNIT CODE: BAF2202    UNIT TITLE: MANAGEMENT ACCOUNTING I                                                                                 

QUESTION TWO

Shell Ltd is trying to decide whether or not to drill for oil on a particular site in North Eastern Kenya. The Chief Engineer has assessed the probabilities that there will be oil as follow, based on past experience.

            Oil                    0.2

            No oil                0.8

It is possible for Shell ltd to hire a firm of international consultants to carry out a complete survey of the site. Shell ltd has used the firm many times before and has made the following estimates:

1. If there really is oil, then there is a 95% chance that the report will be favourable.
2. If there is no oil then there is only a 10% chance that the report will indicate that there is oil.

The following additional information is also provided:

• The cost of drilling is Sh.10 million.
• The value of the benefits if oil is found is Sh.70 million
• The cost of obtaining information is Sh.3 million.

Required:

1. Advise the company on whether to acquire additional information from the consultants                                                                   
2. Compute the value of imperfect information.                          

Answer 1

ANSWER-
Auswa -------- as the the given internating. follow. Gased as Pewbabilities that there will be oil as past experience oil at 0-2 le = 20% po oil_218_le. a 80%. toted . 10r. Cost of drilling value of benit cost fer in temelin = : : sh. lo million sh 70 millim Sh. 3 million _192_ ifcompany off the Advice from Consultert's. and -Comy out a samplele scrupy dinst the probability is very low. $ (20%) for Sind the oil and not feeofal is 80% So, that is opt for drill 95% Apr chace it's Seurable. So we. Can_-off. it. -662 Compute the value...g-imperfect information dotel con Cost of drilling - Shto millen Loftering informulim.__sli 3 milling - tsh.131 million Teneny from the oil sh:70 million Het income sh 57 million when shell lll. drilling oftean o o for explore & and opt for