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The Bush Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project would cost $8 million today. Bush estimates that once drilled, the oil will generate positive net cash flows of $4 million a year at the end of each of the next 4 years. While the company is fairly confident about its cash flow forecast, it recognizes that if it waits 2 years, it would have more information about the local geology as well as the price of oil. Bush estimates that if it waits 2 years, the project would cost $9 million. Moreover, if it waits 2 years, there is a 90% chance that the net cash flows would be $4.2 million a year for 4 years, and there is a 10% chance that the cash flows would be $2.2 million a year for 4 years. Assume that all cash flows are discounted at 10%.
1. If the company chooses to drill today, what is the project's net present value? Round your answer to four decimal places.
2. What is the value of the investment timing option? If necessary round your answer to four decimal places.
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Determine the right price for a stock and discuss the difference between "price" and "value.
If the required return on Argaiv preferred stock is 6%, and if Argaiv pays its next dividend in one year, what is the market price of the preferred stock today?
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Decision of profitable loan among alternatives and you can either take out a standard student loan
A client makes a tax-deductible contribution of $4,000 to a traditional IRA. The client is in the 25% marginal tax bracket. How much are the approximate tax savings?
A financial advisor tells you that you can make your child a millionaire if you just start saving early. You decide to put an equal amount every year into an investment account that earns 8 percent interest per year, beginning on the day your child i..
Find out the future value three years hence of $1000 invested in an account with a stated annual interst rate of 8%:
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