1. A natural gas upstream company acquires a license for an onshore block and estimates that drilling a well will cost US$250 million. If natural gas is found the net present value is forecasted at US$1 billion. From its analysis of the block, the company has determined that there is a 70% chance of drilling a dry hole in this block. a) Draw a decision tree to represent the NPV outcomes of the company. b) Calculate the expected value and state whether the company should go ahead to drill the well.
1. A natural gas upstream company acquires a license for an onshore block and estimates that drilling a well will cost US$250 million. If natural gas is found the net present value is forecasted at US$1 billion. From its analysis of the block, the company has determined that there is a 70% chance of drilling a dry hole in this block. a) Draw a decision tree to represent the NPV outcomes of the company. b) Calculate the expected value and state whether the company should go ahead to drill the well.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![1. A natural gas upstream company acquires a license for an
onshore block and estimates that drilling a well will cost
US$250 million. If natural gas is found the net present
value is forecasted at US$1 billion. From its analysis of the
block, the company has determined that there is a 70%
chance of drilling a dry hole in this block.
a) Draw a decision tree to represent the NPV outcomes of the
company.
b) Calculate the expected value and state whether the company
should ahead to drill the well.
go](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F828ce15e-5110-4547-95d6-c4d8b77d9cae%2Ffe9b7f26-3b8b-43ee-958f-d9f657268980%2F8ng5o6j_processed.jpeg&w=3840&q=75)
Transcribed Image Text:1. A natural gas upstream company acquires a license for an
onshore block and estimates that drilling a well will cost
US$250 million. If natural gas is found the net present
value is forecasted at US$1 billion. From its analysis of the
block, the company has determined that there is a 70%
chance of drilling a dry hole in this block.
a) Draw a decision tree to represent the NPV outcomes of the
company.
b) Calculate the expected value and state whether the company
should ahead to drill the well.
go
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