Pilipinas-Shell, Inc. is contemplating whether to drill for oil source on a tract of land that the company had purchased 10 years ago. The investment required for this project is PhP450.0 million. If the project is pursued, it is expected to bring in cash flows of PhP215.0 million annually for the next four years. With the limited market information available to support the financial forecast, the firm is considering of waiting 2 years before implementing the project until more reliable geology information as well as oil prices be made available. If the firm opt to wait for 2 years, the project will cost PhP600.0 million then cash flows will be expected to continue for 4 years after the initial investment. In addition, if the firm waits for 2 years, there is only 95% chance that expected cash flows will be at PhP220.0 million annually for 4 years. Contrary, there is the 5% chance that the cash flows will be at PhP120.0 million annually for 4 years. The firm used the 11% WACC for this project. What is the expected NPV should the firm proceed with the drilling project today? Will it be more advantageous for the firm to wait 2 years before implementing the project? Discuss. Determine the value of the option. What disadvantages might arise from delaying the timing of the project? Discuss.
Pilipinas-Shell, Inc. is contemplating whether to drill for oil source on a tract of land that the company had purchased 10 years ago. The investment required for this project is PhP450.0 million. If the project is pursued, it is expected to bring in cash flows of PhP215.0 million annually for the next four years. With the limited market information available to support the financial forecast, the firm is considering of waiting 2 years before implementing the project until more reliable geology information as well as oil prices be made available. If the firm opt to wait for 2 years, the project will cost PhP600.0 million then cash flows will be expected to continue for 4 years after the initial investment. In addition, if the firm waits for 2 years, there is only 95% chance that expected cash flows will be at PhP220.0 million annually for 4 years. Contrary, there is the 5% chance that the cash flows will be at PhP120.0 million annually for 4 years. The firm used the 11% WACC for this project. What is the expected NPV should the firm proceed with the drilling project today? Will it be more advantageous for the firm to wait 2 years before implementing the project? Discuss. Determine the value of the option. What disadvantages might arise from delaying the timing of the project? Discuss.
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
Related questions
Question
Pilipinas-Shell, Inc. is contemplating whether to drill for oil source on a tract of land that the company had purchased 10 years ago. The investment required for this project is PhP450.0 million. If the project is pursued, it is expected to bring in cash flows of PhP215.0 million annually for the next four years. With the limited market information available to support the financial
- What is the expected NPV should the firm proceed with the drilling project today?
- Will it be more advantageous for the firm to wait 2 years before implementing the project? Discuss.
- Determine the value of the option.
- What disadvantages might arise from delaying the timing of the project? Discuss.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education