Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The estimated gas reserves of a firm amount to 1 2 million barrels, and the estimated cost of extracting the gas is $ 1 3

The estimated gas reserves of a firm amount to 12 million barrels, and the estimated cost of extracting the gas is $139 million. The current price of gas is $16 per cubic feet (cf), and the average production cost is estimated to be $1 per cubic feet. The company has the rights to these reserves for the next 10 years, and the 10-year bond rate is 5%. The company would need 2.5% of its reserves each year to meet cash flow needs. The annualized standard deviation in the price of gas is 18%. What is the value of the Option?
Group of answer choices
$43,254,382
$41,254,382
$42,254,382
$42,987,382

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

Investing In Mortgage Backed And Asset Backed Securities

Authors: Glenn M. Schultz, Frank J. Fabozzi

1st Edition

1118944003, 978-1118944004

More Books

Students also viewed these Finance questions