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Petroleum inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of
Petroleum inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of $50 million (10) and is expected to remain constant. The price of oil P is $40/bbl and the extraction costs are $25/bbl. The quantity of oil Q=300,000bbl per year forever. The risk-free rate is 6% per year and that is also the cost of capital (Ignore taxes). Calculate the value of the option to wait for one year. $25 million $35.4 million None of the above $10.4 million
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