An oil company owns a tract of land that has good potential for containing oil. The size of the oil deposit is unknown, but from previous experience with land of similar characteristics, the geological engineers predict that an oil well will yield between 0 (a dry well) and 100 million barrels per year over a five-year period.
The following probability distribution for well yield is also estimated. The cost of drilling a well is S10 million, and the profit (after deducting production costs) is SO.50 per barrel. Interest is 10% per year.
Carry 7 out a Monte Carlo simulation of 100 trials and construct a histogram of the resulting net present worth of investing in drilling a well. Comment on your results. Do you recommend drilling?
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Annual Number of Barrels (in Millions)
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Probability
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0
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0.05
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10
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0.1
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20
|
0.1
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30
|
0.1
|
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40
|
0.1
|
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50
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0.1
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60
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0.1
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70
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0.1
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80
|
0.1
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90
|
0.1
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100
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0.05
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