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Exercise-2. Calculate Expected NPV for a minimum ROR 20% to evaluate the economic potential of buying and drilling an oil lease with the following estimated cost, revenues, and success probabilities. The lease would cost 100,000 dollars at time zero and it is considered 100% certain that a well would be drilled to the point of completion one year later for a cost of 500,000 dollars. There is a 60% probability that well logs look good enough to complete the well at year 1 for a 400,000 dollar competition cost. If the well logs are unsatisfactory, an abandonment cost of 40,00ỏ dollars will be incurred at year 1. If the well is completed, it is estimated there will be a 50% probability of generating production that will give 450,000 dollars per year net income for years 2 through 10 and a 35% probability of generating 300,000 dollars per year net income for years 2 through 10, with a 15% probability of the well completion being unsuccessful, due to water or unforeseen completion difficulties, giving a year 2 salvage value of 250,000 dollars for producing equipment. Asses the options?

Exercise-2. Calculate Expected NPV for a minimum ROR 20% to evaluate the economic potential of buying and drilling an oil lease with the following estimated cost, revenues, and success probabilities. The lease would cost 100,000 dollars at time zero and it is considered 100% certain that a well would be drilled to the point of completion one year later for a cost of 500,000 dollars. There is a 60% probability that well logs look good enough to complete the well at year 1 for a 400,000 dollar competition cost. If the well logs are unsatisfactory, an abandonment cost of 40,00ỏ dollars will be incurred at year 1. If the well is completed, it is estimated there will be a 50% probability of generating production that will give 450,000 dollars per year net income for years 2 through 10 and a 35% probability of generating 300,000 dollars per year net income for years 2 through 10, with a 15% probability of the well completion being unsuccessful, due to water or unforeseen completion difficulties, giving a year 2 salvage value of 250,000 dollars for producing equipment. Asses the options?

Essentials Of Investments
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
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Exercise-2. Calculate Expected NPV for a minimum ROR 20% to evaluate the economic potential of buying and drilling an oil lease with the following estimated cost, revenues, and success probabilities. • The lease would cost 100,000 dollars at time zero and it is considered 100% certain that a well would be drilled to the point of completion one year later for a cost of 500,000 dollars. There is a 60% probability that well logs look good enough to complete the well at year 1 for a 400,000 dollar competition cost. If the well logs are unsatisfactory, an abandonment cost of 40,000 dollars will be incurred at year 1. If the well is completed, it is estimated there will be a 50% probability of generating production that will give 450,000 dollars per year net income for years 2 through 10 and a 35% probability of generating 300,000 dollars per year net income for years 2 through 10, with a 15% probability of the well completion being unsuccessful, due to water or unforeseen completion difficulties, giving a year 2 salvage value of 250,000 dollars for producing equipment. Asses the options?
Transcribed Image Text:Exercise-2. Calculate Expected NPV for a minimum ROR 20% to evaluate the economic potential of buying and drilling an oil lease with the following estimated cost, revenues, and success probabilities. • The lease would cost 100,000 dollars at time zero and it is considered 100% certain that a well would be drilled to the point of completion one year later for a cost of 500,000 dollars. There is a 60% probability that well logs look good enough to complete the well at year 1 for a 400,000 dollar competition cost. If the well logs are unsatisfactory, an abandonment cost of 40,000 dollars will be incurred at year 1. If the well is completed, it is estimated there will be a 50% probability of generating production that will give 450,000 dollars per year net income for years 2 through 10 and a 35% probability of generating 300,000 dollars per year net income for years 2 through 10, with a 15% probability of the well completion being unsuccessful, due to water or unforeseen completion difficulties, giving a year 2 salvage value of 250,000 dollars for producing equipment. Asses the options?
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