Business, 12.08.2020 08:01 jasminellenaee

You are the CEO of and oil company, and you are considering the prospect of acquiring an oil property. If you invest in developing the property, the Present Value of the future cash flows from the property is $81.2 million. However, the present value of the development costs required is $86 million. You do not have to start developing the property immediately, but the maximum you can wait is 6 years. If not developed after 6 years, your lease will expire. Once developed, however, the property is yours until the reserve is depleted. Interest rate is 8.24% per annum. You estimate that the volatility of crude oil prices is 41%. a. The real option to delay the development is out of the money
b. Since your lease is expiring in 6 years if not developed, you face significant cost of delay
c. The strike price of the real option is $81.2 million
d. You have enough information to calculate development lag

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