Drilling Experts, Inc. Drilling Experts, Inc. (DEI) finds and develops oil properties and then sells the successful ones to major oil refining companies. DEI is now considering a new potential field, and its geologists have developed the following data, in thousands of dollars. A $400 feasibility study would be conducted at t=0. The results of this study would determine if the company should commence drilling operations or make no further investment and abandon the project. t=1. If the feasibility study indicates good potential, the firm would spend $1,000 at t=1 to drill exploratory wells. The best estimate is that there is an 80% probability that the exploratory wells would indicate good potential and thus that further work would be done, and a 20% probability that the outlook would look bad and the project would be abandoned. If the exploratory wells test positive. DEI would go ahead and spend $10,000 to obtain an acurate estimate of the amount of oil in the field at t 2. The best estimate now is that there is a 60% probability that the results would be very good and a 40% probability that results would be poor and the field would be abandoned. If the full drilling program is carried out, there is a 50% probability of finding a lot of oil and receiving a $25,000 cash inflow at t 3. and a 50% probability of finding less oil and then only receiving a $10,000 inflow. Refer to the data for Drilling Experts, Incorporated. Since the project is considered to be quite risky, a 20% cost of capital is used. What is the project's expected NPV, in thousands of dollars? O a. $461.11 O b. 5336.15 O. 5507.22 Od. $373.50 e.$415.00
Drilling Experts, Inc. Drilling Experts, Inc. (DEI) finds and develops oil properties and then sells the successful ones to major oil refining companies. DEI is now considering a new potential field, and its geologists have developed the following data, in thousands of dollars. A $400 feasibility study would be conducted at t=0. The results of this study would determine if the company should commence drilling operations or make no further investment and abandon the project. t=1. If the feasibility study indicates good potential, the firm would spend $1,000 at t=1 to drill exploratory wells. The best estimate is that there is an 80% probability that the exploratory wells would indicate good potential and thus that further work would be done, and a 20% probability that the outlook would look bad and the project would be abandoned. If the exploratory wells test positive. DEI would go ahead and spend $10,000 to obtain an acurate estimate of the amount of oil in the field at t 2. The best estimate now is that there is a 60% probability that the results would be very good and a 40% probability that results would be poor and the field would be abandoned. If the full drilling program is carried out, there is a 50% probability of finding a lot of oil and receiving a $25,000 cash inflow at t 3. and a 50% probability of finding less oil and then only receiving a $10,000 inflow. Refer to the data for Drilling Experts, Incorporated. Since the project is considered to be quite risky, a 20% cost of capital is used. What is the project's expected NPV, in thousands of dollars? O a. $461.11 O b. 5336.15 O. 5507.22 Od. $373.50 e.$415.00
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:napters 11, 12, 13, & 14)
Drilling Experts, Inc.
Drilling Experts, Inc. (DEI) finds and develops oil properties and then sells the successful ones to major oil refining companies. DEI is now
considering a new potential field, and its geologists have developed the following data, in thousands of dollars.
A $400 feasibility study would be conducted att=0. The results of this study
would determine if the company should commence drilling operations or
make no further investment and abandon the project.
t=0.
If the feasibility study indicates good potential, the firm would spend $1.000
at t=1 to drill exploratory wells. The best estimate is that there is an 80%
probability that the exploratory wells would indicate good potential and thus
that further work would be done, and a 20% probability that the outlook
would look bad and the project would be abandoned.
t=1.
If the exploratory wells test positive. DEI would go ahead and spend $10,000
to obtain an accurate estimate of the amount of oil in the field at t= 2. The
best estimate now is that there is a 60% probability that the results would be
very good and a 409% probability that results would be poor and the field
would be abandoned.
I=2.
If the full drilling program is carried out, there is a 50%6 probability of finding a
lot of oll and receiving a $25.000 cash inflow at t = 3, and a 50%% probability of
finding less oil and then only receiving a $10,000 inflow.
Refer to the data for Drilling Experts, Incorporated. Since the project is considered to be quite risky, a 20% cost of capital is used. What is
the project's expected NPV, in thousands of dollars?
O a. $461.11
O b. 5336.15
O 5507.22
O d $37350
e $415.00
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