ABSTRACT
This chapter provides an economic evaluation of a hypothetical wildcat oil well in Colorado. Where past discovery ratios are known, petroleum exploration managers can bring objectivity into the evaluation of their chances of their success. Mineral exploration managers indicate that, for each one thousand prospects, perhaps one hundred will warrant detailed investigation and one will be a commercial deposit. It is imperative that the assets of the exploration group are adequate to avoid "gambler's ruin". Petroleum explorationists and, to a lesser extent, mineral explorationists use Expected Monetary Value (EMV) to rank investment alternatives. The decision rule is to select the alternative with the highest positive EMV. EMV includes all of the risk and uncertainty of exploration into one estimate of the probability of success for a particular outcome. Multiplying the probabilities and the net present values, the EMV at the chance node is $277,000.
