1.Luckoil Inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of $70 million and is expected to remain constant. The extraction costs are $35/bbl. The quantity of oil Q = 300,000 bbl per year forever. The cost of capital is 6% per year (ignore taxes).

Next year when the rig is constructed the price is expected to be either $60/bbl or $30/bbl with 60% and 40% probability, respectively. The firm can cap the rig at a cost of $10 million (abandonment option). The firm can restart pumping when oil price more favorable. Calculate the value of the abandonment option.