Valuation of Exploratory Prospect
{"Image DocumentName": "Valuation of Exploratory Prospect", "Image ImageDescription": "Suppose that the firm has 5 years option to drill the wildcat. Other firm wants to buy the rights of the tract for   3 million  . Do you sell? How valuable is the prospect? 25 million   (IW = wildcat investment) 20% (CF = chance factor) Dry Hole. Compact Tree Success. E[B] = 150 million barrels (expected reserve size) E[q] = 20% (expected quality of developed reserve) P(t = 0) = US  20/bbl (long-run expected price at t = 0) D(E[B]) = (2 . E[B]) \uf0de D(E[B]) = 500 million   \uf0de NPV = q P B - D = (20% ) = MM  However, there is only 20% chances to find petroleum. EMV = Expected Monetary Value = - IW + (CF . NPV) \uf0de \uf0de EMV = (20% . 100) = - 5 million   Do you sell the prospect rights for any offer?", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}