1. You are a manager of a firm like Oasis Petroleum, an explorer and developer of shale oil in the Williston Basis. You own a drilling rig that you purchased for $10 million. The life of a drilling rig is 10 years and your accountants use straightline depreciation. It's the start of the year and the current market value of the rig is $6 million, so you can sell it to another driller for $6 million. If you sell the rig, you can use the funds in an investment that returns a profit of 9 percent. Alternatively, you can rent the rig to another developer for this year for $1.1 million. At the end of the year, the rig will be worth $5.5 million.

• What is the depreciation allowance?
• What is your opportunity cost if your firm uses the rig?
• What is the true cost to your firm of using the rig? Explain your answer.