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Question

An oil field has a 40% probability of being rich, a 30 % probability of being normal, and a 30 % probability of

being poor. In each case, it will produce cash inflows of $5 million, $3 million, and $1 million per year, respectively, for 15 years starting from 2 years after an oil well is drilled. Drilling a well costs $15 million. If you spend $1 million testing the oil field, then after 2 years you will learn whether the oil field is rich, normal, or poor, and you can decide whether or not to drill. The MARR is 10% per year.


(a) Find the expected net present value when you do the test now.


(b) Find the value of doing the test.


1.

(a) $7.1 million; (b) $0.2 million


2.

(a) $6.9 million; (b) $0.2 million


3.

(a) $7.1 million; (b) -$0.2 million


4.

(a) $6.9 million; (b) -$0.2 million

Top Answer

4. a) $6.9... View the full answer

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