Question: Company B owns a lease granting it the right to explore for oil on a certain piece of property. T…

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Jun 13, 2022

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Question: Company B owns a lease granting it the right to explore for oil on a certain piece of property. T…

by | Jun 13, 2022 | Questions & Answers


Company B owns a lease granting it the right to explore for oil
on a certain piece of property. They may sell the lease for $50,000
and let another company take the risk or they may drill hoping to
find oil or gas. The three possible drilling outcomes are listed
below, together with probabilities of occurrence and
payoffs.

Possible outcome Probability Payoff
Dry well 0.2 -$100,000
Gas well 0.3 50,000
Oil well 0.5 100,000

Should the company drill or sell the lease?

a.

Drill

b.

Sell

c.

Do nothing

d.

None of the above

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