Question

Assume drilling a well costs $500,000. There are three probable outcomes: a) 60% probability that the drilled well is a dry hole b) 40% probability that the drilled well is a producer well with such rate that can be sold immediately at $2,500,000 c) the drilled well is a producer well with such rate that can be sold immediately at 2,500,000 Calculate the project's expected value. (Present your answer in dollars but without $ sign)

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Answer 1

Project's expected value = Expected profit - cost

Project's expected value = (60%*0 + 40%*2500000) - 500000

Project's expected value = 500000

So, expected value of the project will be 500000.

Outcome B and C are same. If there is a difference in probability, then post it via comment for modified answer.