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Question
The price of oil is $115 per barrel. The effective lease rate and risk free rate are 3.0% and 4.0%, respectively. The constant cost of extraction is $85 per barrel and the volatility of prices is 15.0%. If an untapped well costs $2,100 to open and can produce indefinitely, what is the value of the unopened well?A) $724
B) $854
C) $913
D) $1,025
Answer
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