An existing well is operating and 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 it costs nothing to shut down the well,at what price would we close the well?
A) $41
B) $48
C) $52
D) $59

Question

Quizplus · Accepted Answer

The well should be closed when the price of oil falls below the cost of extraction. The cost of extraction is $85 per barrel, and the effective lease rate and risk-free rate are not directly relevant to the decision to shut down. Therefore, the well should be closed when the price falls below $85, which is not an option here. However, the closest option that represents a significant drop from the current price is $41.

An Existing Well Is Operating and the Price of Oil