Explore BrainMass
Share

Explore BrainMass

    Expected Monetary Value: Leasing Versus Drilling

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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.

    © BrainMass Inc. brainmass.com October 9, 2019, 7:58 pm ad1c9bdddf
    https://brainmass.com/economics/microeconomics/expected-monetary-value-leasing-versus-drilling-134807

    Solution Preview

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

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

    Solution Summary

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

    $2.19