Engineering Economy 16th Edition by William Sullivan ,Elin Wicks, Koelling,

Exercise 1

A large mudslide caused by heavy rains will cost Sabino County $1,000,000 per occurrence in lost property tax revenues. In any given year, there is one chance in 100 that a major mudslide will occur.
A civil engineer has proposed constructing a culvert on a mountain where mudslides are likely. This culvert will reduce the likelihood of a mudslide to near zero. The investment cost would be $50,000, and annual maintenance expenses would be $2,000 in the first year, increasing by 5% per year thereafter. If the life of the culvert is expected to be 20 years and the cost of capital to Sabino County is 7% per year, should the culvert be built (Problem)
Problem
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.
c. Perform one-at-a-time sensitivity analyses for ±20% changes in daily well production and selling price of natural gas. Use a 10-year life for the well.