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You Are the Owner of a Natural Gas Well That

Question 70

Multiple Choice

You are the owner of a natural gas well that can produce exactly (at today's prices) $1,000,000 worth of gas per year for exactly 5 years.You also know (with certainty) that the correct discount rate for these revenues is 10%.An oil and gas production firm offers you $5,000,000 today for the natural gas well.What is the implied value of the real option to not produce or not to produce natural gas?


A) $0
B) $604,607
C) $1,209,213
D) $2,418,426

Correct Answer:

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