Purchase Solution

# Expected Monetary Value: Leasing Versus Drilling

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One day a representative of a natural gas company comes to your home and expresses interest in obtaining the mineral rights (including natural gas) to your 1,000-acre homestead. They offer you a flat fee of \$10,000 plus and additional \$50,000 if they discover gas. You have the option of drilling yourself for a cost of \$15,000. If you discover natural gas, you estimate that you can sell the mineral rights for \$150,000. The probability of finding gas is estimated to be 0.60 for both you and the gas company. Your production/drilling costs are estimated to be \$25,000.

Determine the expected monetary value of leasing versus drilling. Show your calculations clearly.

##### Solution Summary

The solution determines the expected monetary value of leasing versus drilling. Step by step calculations are provided for each.

##### Solution Preview

Determine the expected monetary value of leasing versus drilling. Show your calculations clearly.

Leasing:
Flat fees = \$10,000
On ...

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