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Unformatted text preview: Expected NPV = .1(-1.674) + .9(3.564) = 3.040 If the cash flows are only $2.2 million, the NPV of the project is negative and, thus, would not be undertaken. The value of the option of waiting two years is evaluated as 0.10($0) + 0.90($3.564) = $3.208 million. Since the NPV of waiting two years is less than going ahead and proceeding with the project today, it makes sense to drill today. 10% r = 10%...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
- Spring '08