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Expected Monetary Value: Leasing Versus Drilling

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Please help with the following problem.

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.

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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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