Petroleum Inc

Multiple Choice

Petroleum Inc.(PI) controls off-shore oil leases.It is considering the construction of a deep-sea oil rig at a cost of $500 million.The price of oil is $100/bbl.and extraction costs are $50/bbl.PI expects costs to remain constant.The rig will produce an estimated 1,200,000 bbl.per year forever.The risk-free rate is 10% per year,which is also the cost of capital.(Ignore taxes) .Suppose that oil prices are uncertain and are equally likely to be $120/bbl.or $80/bbl.next year.
Suppose that PI has the option to postpone the project by one year.Calculate the value of the real option to postpone the project for one year.

A) +$30 million
B) +$50 million
C) +$54 million
D) +$70 million