What is the value of the investment timing option

Assignment Help Finance Basics

Reference no: EM13275231

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.

Reference no: EM13275231

Questions Cloud

Determine the minimum numbber of bit required for each word : 1) Determine the number of possible PCM values that can be encoded for (a) 6 bits and (b) 10 bits. 2)it is desired to represent an analog signal in no less than 500 values. determine the minimum numbber of bits required for each word.

Calculate the value of cost of goods sold : Calculate the value of cost of goods sold for Peterson Brewing given the following information: Current liabilities = $340,000; Quick ratio = 1.8; Inventory turnover = 4.0; Current ratio = 3.3.

Explain ice melts and the temperature of the water decreases : A 45- piece of ice at 0 is added to a sample of water at 20. All of the ice melts and the temperature of the water decreases to 0. How many grams of water were in the sample

What is spectral efficiency of theoretical max throughput : Shannon's Law describes the relationship between bandwidth, signal power, and noise in determining the theoretical maximum Capacity in bits per second of a particular communications channel.

What is the value of the investment timing option : If the company chooses to drill today, what is the project's net present value? Round your answer to four decimal places.

What is danny d days sales in inventory : Danny D. Inc. had cost of goods sold of $5,200, net working capital of $120, total current assets of $600, and a quick ratio of 0.8. What is Danny D's days' sales in inventory?

Explain the correct ph of pure water after adding hcl : Which of the following is the correct pH of a 211.7 mL solution (final volume) of pure water after 52.3 mL of 1.00 mM HCl was added

What is maximum horizontal motion of the work-piece motion : The work-piece motion of a certain system is measured using an LVDT that outputs 12mV/cm. (i) If the output from the LVDT ranges from -12mV to 24mV, what is the maximum horizontal motion of the work-piece motion

Determine the gravitational field : A planet of total mass M and radius R has a non-uniform density such that p(r) = po (1-r/R), Determine the gravitational field g(r) at a point r ? R inside the planet

User Account

All Pages