Sam Owns an Oil Field with a Number of Producing

question 7

Multiple Choice

Sam owns an oil field with a number of producing wells.In the past,he has started and stopped production of these wells as the price of oil fluctuated over time.Assume the government imposes additional requirements on non-producing wells that are still production capable.These requirements are expected to increase the cost of stopping well production by 30 percent.As a result,Sam should be:

• A)keeping all wells open continuously.
• B)closing wells only if he plans to keep them closed permanently.
• C)willing to keep wells operating at a lower level of profitability than he has in the past.
• D)increasing the cost of capital he applies to his well evaluation analysis.
• E)opening wells at a lower p_open price.

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Definitions:

Economy Booms

A period of rapid economic growth and expansion characterized by high employment, increasing consumer confidence, and elevated business production.

Expected Rate

The anticipated return on an investment, often used to estimate the future value of investments or to guide investment decisions.

Beta

An indicator of how much a stock's price fluctuates compared to the general market, representing its relative risk.

Risk-Free Rate

The expected yield on an investment that is considered completely risk-free, often linked to government securities.