Question: Consider the oil project with a single barrel, in which S = $15, r = 5%, = 4%, and X = $13.60. Suppose that,

Consider the oil project with a single barrel, in which S = $15, r = 5%, δ = 4%, and X = $13.60. Suppose that, in addition, the land can be sold for the residual value of R = $1 after the barrel of oil is extracted. What is the value of the land?

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The residual value of the land effectively lowers the extraction costs ie the strike price ... View full answer

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