The management of Oilco is trying to determine a profit-maximizing bid for the right to drill on a field. The management estimates the value of the right to drill to be equally likely between $45 and $55 million, i.e., Uniformly distribution. Two competitors will bid against Oilco. Based on past history, Oilco believes that each competitor is equally likely to bid between $40 million and $50 million.
What should Oilco bid to maximize its expected profit? Use @Risk (and RiskSimTable) with 100 iterations for each possible bid.
Hint: Profit = (value – Oilco’s bid) if Oilco’s bid is larger than the two competitors’ bids, else profit is 0. Hint: Try $42 to $49 million in steps of $1 million.
!!show all the formulas used in excel!!
