ev=-25000+500000*.03+150000*.06
looks like a losing venture.
However, I wonder what "revenue" means. Getting oil or gas out costs much more than a "test" well. For instance, wellhead piping, distribution piping, etc. So this venture is likely to really be a sour investment.
A Texas oil drilling company has determined that it costs $25,000 to sink a test well. If oil is hit,
the revenue for the company will be $500,000. If natural gas is found, the revenue will be
$150,000. If the probability of hitting oil is 3% and of hitting gas is 6%, find the expected value of
sinking a test well.
1 answer