The ABC Company is considering the purchase of mineral rights on a piece of property for P50,000.
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Question:
- The ABC Company is considering the purchase of mineral rights on a piece of property for P50,000. The price includes a seismic test of whether the land is of type X geological formation or type Y. The test cannot be done until after the purchase is made. According to reliable information, 60% of the land is of type X formation and 40% of the area of type Y. If the company decides to drill on the land it will cost P150,000. It may hit oil, gas, or dry well. Drilling experience indicates that the probability of hitting oil is 30% on X formation and 10% on Y formation. The probability of hitting gas is 25% on X formation and 40% on Y formation. The estimated return from an oil well is P800,000 and from a gas well, P500,000. Should the company purchase the mineral rights?
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