You work for a large international oil company searching for oil off the coast of Australia, not too far from Melbourne. Your firm has acquired drilling rights, and you are contemplating your firm's options.
The estimated drilling cost is $40 million. There are two possible outcomes: either there is oil at the site or there is no oil. Based on the available data, your geologists assign a 20% chance that there is oil at the site (the site is "wet"). If there is oil, your geologists believe that the expected present value of a well in this location is $160 million. If there is no oil (the site is "dry"), assume that the value of the drilled site is $0.
What is the break even probability?