There is a 32% chance that the amount of oil in a prospective field is 6 million barrels and a 68% chance of 15 million barrels. If the actual amount of oil is million barrels, the present value of the cash flows from drilling will be $2 million. If the amount is 15 million barrels, the present value will be $7 million. The cost to drill the well is $5 million. Suppose, a test that costs $450,000 can verify the amount of oil under the ground, is it worth paying for the test? Please enter the full number as your answer. (.e., 10,000,000 and NOT 10 million) What is the net present value of not testing? Number What is the net present value of testing? Number Should the company perform the test to verify the amount of oil under the ground?
There is a 32% chance that the amount of oil in a prospective field is 6 million barrels and a 68% chance of 15 million barrels. If the actual amount of oil is million barrels, the present value of the cash flows from drilling will be $2 million. If the amount is 15 million barrels, the present value will be $7 million. The cost to drill the well is $5 million. Suppose, a test that costs $450,000 can verify the amount of oil under the ground, is it worth paying for the test? Please enter the full number as your answer. (.e., 10,000,000 and NOT 10 million) What is the net present value of not testing? Number What is the net present value of testing? Number Should the company perform the test to verify the amount of oil under the ground?
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:There is a 32% chance that the amount of oil in a prospective field is 6 million barrels and a 68% chance of 15 million barrels. If the actual amount of oil is 6
million barrels, the present value of the cash flows from drilling will be $2 million. If the amount is 15 million barrels, the present value will be $7 million. The
cost to drill the well is $5 million. Suppose, a test that costs $450,000 can verify the amount of oil under the ground, is it worth paying for the test?
Please enter the full number as your answer. (i.e., 10,000,000 and NOT 10 million)
What is the net present value of not testing? Number
What is the net present value of testing? Number
Should the company perform the test to verity the amount of oil under the ground?
Test
No Test
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