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# 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

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

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