Investment Timing Option: Decision-Tree Analysis The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates the project would cost $6 million today. Karns estimates that, once drilled, the oil will generate positive net cash flows of $2.7 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, in 2 years it will have more information about the local geology and about the price of oil. Karns estimates that if it waits 2 years then the project would cost $7 million. Moreover, if it waits 2 years, then there is a 90% chance that the net cash flows would be $3.3 million a year for 4 years and a 10% chance that they would be $1.8 million a year for 4 years. Assume all cash flows are discounted at 10%. If the company chooses to drill today, what is the project's net present value? A negative value should be entered with a negative sign. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million Using decision-tree analysis, does it make sense to wait 2 years before deciding whether to drill?
Investment Timing Option: Decision-Tree Analysis The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates the project would cost $6 million today. Karns estimates that, once drilled, the oil will generate positive net cash flows of $2.7 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, in 2 years it will have more information about the local geology and about the price of oil. Karns estimates that if it waits 2 years then the project would cost $7 million. Moreover, if it waits 2 years, then there is a 90% chance that the net cash flows would be $3.3 million a year for 4 years and a 10% chance that they would be $1.8 million a year for 4 years. Assume all cash flows are discounted at 10%. If the company chooses to drill today, what is the project's net present value? A negative value should be entered with a negative sign. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million Using decision-tree analysis, does it make sense to wait 2 years before deciding whether to drill?
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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Problem 26-02
Investment Timing Option: Decision-Tree Analysis
The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates the project would cost $6 million today. Karns estimates that, once drilled, the oil will generate positive net cash flows of $2.7 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow
- If the company chooses to drill today, what is the project's
net present value ? A negative value should be entered with a negative sign. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million - Using decision-tree analysis, does it make sense to wait 2 years before deciding whether to drill?
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