It costs $250,000 to drill a natural gas well. Operating expenses will be 10% of the revenue from the sale of natural gas from this particular well. If found, natural gas from a highly productive well will amount to 260,000 cubic feet per day. The probability of locating such a productive well, however, is about 10%.
a. If natural gas sells for $8 per thousand cubic feet, what is the E(PW) of profit to the owner/operator of this well? The life of the well is 10 years and MARR is 15% per year.
b. Repeat Part (a) when the life of the well is seven years.