Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

2. An oil company is drilling a series of new wells on the perimeter of a producing oil field. About 20% of the new wells

image text in transcribed

2. An oil company is drilling a series of new wells on the perimeter of a producing oil field. About 20% of the new wells will be dry holes (i.e. the production will be 0 barrels per day). Even if a new well strikes oil, there is still uncertainty about the amount of oil produced. Of the new wells that strike oil, 40% produce only 1,000 barrels a day (low yield) and 60% produce 5,000 barrels per day (high yield). (1) Suppose the oil price is $50 per barrel. What is the expected value and standard deviation of the annual revenue of an oil well (assume the well produces oil on 365 days per year)? (2) If the company plans to dig 3 wells, and the outcome of the 3 wells are independent of each other (i.e. the p between every two wells is 0), what is the expected value and standard deviation of the average annual revenue from the 3 wells? (3) Suppose the incremental cash flows of digging and operating a well under the three possible scenarios are as follows. Using a 20% annual discount rate, what is the expected value of the NPV of one well? Year 0 1 Dry -150M 0 Low Yield - 150M -13M 5M 5M High Yield -150M -10M 2-19 20 80M 5M

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Management

Authors: Jeff Madura, Roland Fox

4th Edition

147372550X, 9781473725508

More Books

Students also viewed these Finance questions

Question

Outline two major problems for psychogenic identity theory.

Answered: 1 week ago

Question

What were the reasons the collective agreement was achieved?

Answered: 1 week ago

Question

What does Copp say is the most important asset of any airline?

Answered: 1 week ago