This Paper discusses a personal computer (PC) model that uses utility theory to calculate the Risk Adjusted Value (RAV) by combining the components of the Expected Value (EV) calculation with an assessment of the decision maker's Risk Tolerance (RT). The RT can be calculated from prior working interest decisions or approximated using company average RT. The RAV is always equal to or less than the EV for risk averse corporations. The RAV for risky ventures may be higher at less than 100% working interest (Wl), indicating the optimum Wl is less than 100%.
The distributions of RAV's for a venture or portfolio of ventures are calculated by varying the Wl at discrete intervals and recalculating the RAV or using the Solver (linear program add in) included with most spreadsheet software. The Solver can be further constrained to model a limited capital budget and then used as a portfolio optimizer. Uncertainty in any of the parameters can be accommodated using a Monte Carlo add in.