1. Your oil company must decide whether to drill a well at a cost of $500,000 on
ID: 1187812 • Letter: 1
Question
1. Your oil company must decide whether to drill a well at a cost of $500,000 on a piece of leased property or to sell the lease for $1,000,000. The lease was purchased in 2003 for $120,000 and is on a prospect in a fairly well established field. Thus far, 65 wells have been drilled in the field. The results of drilling are 15 dry holes, 12 gas producers, 18 oil wells, and 20 wells producing both oil and gas. The present worth of all future production for each type of well is as follows: gas, $2,550,000; oil, $4,500,000; and both gas and oil, $3,600,000. If the decision is to be based on maximum expected value, what should be done? k
Explanation / Answer
Decision should be that they should drill the well as it will give them lifeime profit and maximum expected value as if they decide to sell the lease then it will give them one time profit.!!
So the ultimate decision should be drill well in lease..!!
Plz.. rate my answer with 5 star ratings.!!
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