What approach would you use to value the asset

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Question: The lead time for delivery of the largest offshore platforms for oil and gas drilling and collecting is now 2 years. ConExoco Petroleum is thinking about putting down a $15 million nonrefundable deposit on one in the Gulf of Mexico. This deposit is 15% of what the purchase price would be in 2 years. ConExoco will want this structure badly in 2 years if (1) the exploratory drilling on their newly leased tracts shows substantial oil and gas reserves when completed in 2 years and (2) the price of oil is high enough at that time to put the equipment into immediate use ($45/barrel would do it). Because ConExoco would be in a much better position than anyone else to use this specialized platform in 2 years, if they don't take it, no one else would want it and ConExoco would forfeit its deposit. Structure a real-options approach for deciding whether to make such a deposit. What variables would you include in your analysis? What value would you need to compute using those variables? What would the triggering formula look like using those variables? What approach would you use to value the asset?

Reference no: EM131524477

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