Petroleum 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 $50 million (C0) and is expected to remain constant. The
Price of oil P is $60/bbl and the extraction costs are $35/bbl. The quantity of oil Q = 300,000 bbl per year forever. The risk-free rate is 6% per year and that is also the cost of capital (Ignore taxes). The firm has constructed the oil rig and a year later the oil price has plummeted to $30/bbl. The firm can cap the rig at a cost of $10 million. The firm can restart pumping when oil is price more favorable. Calculate the NPV of capping the rig: (abandonment option).

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The Answer of Petroleum 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 $50 million (C0) and is expected to remain constant. The
Price of oil P is $60/bbl and the extraction costs are $35/bbl. The quantity of oil Q = 300,000 bbl per year forever. The risk-free rate is 6% per year and that is also the cost of capital (Ignore taxes). The firm has constructed the oil rig and a year later the oil price has plummeted to $30/bbl. The firm can cap the rig at a cost of $10 million. The firm can restart pumping when oil is price more favorable. Calculate the NPV of capping the rig: (abandonment option).