Petroleum Inc. owns a lease to extract crude oil from sea
June 7th, 2024
Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of $50 million (C0) and is expected to remain constant. The price of oil P is $40/bbl and the extraction costs are $25/bbl. The quantity of oil Q = 300,000 bbl per year forever. The risk-free rate is 6% per year and that is also the cost of capital (Ignore taxes).Suppose the oil price is uncertain and can be $60/bbl or $30/bbl next year with equal probability, then the value of the option to postpone the project by one year is how much?