Pls do fast ..i will like for sure Try to answer in typed form Consider the following natural resources investment opportunity: there is a piece of land and you have information that it has underground natural gas reserves. However, you do not know how large the reserves are. You are offered to purchase the land (including the right to extract and sell the natural gas) for $20 million. If purchased, you can send your geological exploration team in order to investigate the size of the gas reserves which will cost $2 million upfront and take one year. After the investigation, you will know whether the reserves are large or small. Your geological advisor estimates that the chances for a large gas field are 40%. If the reserves are large, building production facilities will cost $10 million. If the reserves are small, building production facilities will only costs $2 million. Building the production facilities will take 1 year before the first gas can be extracted. Assume that the large gas field will provide sales of $6 million every year forever at an annual cost of $1 million. The small gas field will provide sales of $2.5 million every year forever at an annual cost of $500,000. If you decide not to exploit the natural gas, you can sell the land immediately for other use at a price of $17 million. Assume a cost of capital of 10%. . Illustrate the situation in a decision tree.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 1MAD: San Lucas Corporation is considering investment in robotic machinery based upon the following...

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Pls do fast ..i will like for sure Try to answer in typed form Consider the following natural resources investment opportunity: there is a piece of land and you have information that it has underground natural gas reserves. However, you do not know how large the reserves are. You are offered to purchase the land (including the right to extract and sell the natural gas) for $20 million. If purchased, you can send your geological exploration team in order to investigate the size of the gas reserves which will cost $2 million upfront and take one year. After the investigation, you will know whether the reserves are large or small. Your geological advisor estimates that the chances for a large gas field are 40%. If the reserves are large, building production facilities will cost $10 million. If the reserves are small, building production facilities will only costs $2 million. Building the production facilities will take 1 year before the first gas can be extracted. Assume that the large gas field will provide sales of $6 million every year forever at an annual cost of $1 million. The small gas field will provide sales of $2.5 million every year forever at an annual cost of $500,000. If you decide not to exploit the natural gas, you can sell the land immediately for other use at a price of $17 million. Assume a cost of capital of 10%. . Illustrate the situation in a decision tree.

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