D. Craig Exploration Company has been offered a lease to drill for oil on a particularpiece of property. While oil has been found on nearby land, there are no assurancesthat D. Craig will be successful in finding oil. The company feels that it will strike amajor find, an average find, or a dry hole. A major find can be sold to an oil companyfor $6 million, while an average find will only be sold for $2 million. A dry hole willcost the company $80,000 to cap.The lease costs $400,000, plus if the oil well is sold to an oil company, then 20% ofthe revenue goes to the lease. D. Craig estimates that it can drill a well at a cost of$160,000. Without further testing, D. Craig’ geologist estimates that there is a 5%chance that the well will be a major find, a 35% chance that it will be an average find,and a 60% chance that it will be a dry hole.In order to get a better estimate of the probability of finding oil in the well, thegeologist is contemplating performing either a geologic or a seismic test. A geologic test will cost $20,000. If the test predicts oil, the geologist believes that the followingprobabilities hold:P(test predicts oil | major find) = .70P(test predicts oil | average find) = .50P(test predicts oil | dry hole) = .30Instead of the geologic test, the firm can perform the more detailed seismic test,which costs $50,000. If this test predicts oil, the geologist believes that the followingprobabilities hold:P(test predicts oil | major find) = .90P(test predicts oil | average find) = .70P(test predicts oil | dry hole) = .10If D. Craig gets a prediction of oil from either the geologic or seismic tests, it can sella half-interest in the well to a Dallas investor for $800,000. In this case D. Craig willbe responsible for any and all losses on the well should it lose money, but will splitprofits (excluding cost for conducting tests) on the well equally with the investor if itmakes profit.What is D. Craig’ optimal strategy?