Pls do fast ..i will like for sure Try to answer in typed form Consider the following natural resources investment opportunity: there is a piece of land and you have information that it has underground natural gas reserves. However, you do not know how large the reserves are. You are offered to purchase the land (including the right to extract and sell the natural gas) for $20 million. If purchased, you can send your geological exploration team in order to investigate the size of the gas reserves which will cost $2 million upfront and take one year. After the investigation, you will know whether the reserves are large or small. Your geological advisor estimates that the chances for a large gas field are 40%. If the reserves are large, building production facilities will cost $10 million. If the reserves are small, building production facilities will only costs $2 million. Building the production facilities will take 1 year before the first gas can be extracted. Assume that the large gas field will provide sales of $6 million every year forever at an annual cost of $1 million. The small gas field will provide sales of $2.5 million every year forever at an annual cost of $500,000. If you decide not to exploit the natural gas, you can sell the land immediately for other use at a price of $17 million. Assume a cost of capital of 10%. . Illustrate the situation in a decision tree.
Pls do fast ..i will like for sure Try to answer in typed form Consider the following natural resources investment opportunity: there is a piece of land and you have information that it has underground natural gas reserves. However, you do not know how large the reserves are. You are offered to purchase the land (including the right to extract and sell the natural gas) for $20 million. If purchased, you can send your geological exploration team in order to investigate the size of the gas reserves which will cost $2 million upfront and take one year. After the investigation, you will know whether the reserves are large or small. Your geological advisor estimates that the chances for a large gas field are 40%. If the reserves are large, building production facilities will cost $10 million. If the reserves are small, building production facilities will only costs $2 million. Building the production facilities will take 1 year before the first gas can be extracted. Assume that the large gas field will provide sales of $6 million every year forever at an annual cost of $1 million. The small gas field will provide sales of $2.5 million every year forever at an annual cost of $500,000. If you decide not to exploit the natural gas, you can sell the land immediately for other use at a price of $17 million. Assume a cost of capital of 10%. . Illustrate the situation in a decision tree.
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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Pls do fast ..i will like for sure
Try to answer in typed form
Consider the following natural resources investment opportunity: there is
a piece of land and you have information that it has underground natural
gas reserves. However, you do not know how large the reserves are. You
are offered to purchase the land (including the right to extract and sell the
natural gas) for $20 million. If purchased, you can send your geological
exploration team in order to investigate the size of the gas reserves which
will cost $2 million upfront and take one year. After the investigation, you
will know whether the reserves are large or small. Your geological advisor
estimates that the chances for a large gas field are 40%. If the reserves
are large, building production facilities will cost $10 million. If the reserves
are small, building production facilities will only costs $2 million. Building
the production facilities will take 1 year before the first gas can be
extracted. Assume that the large gas field will provide sales of $6 million
every year forever at an annual cost of $1 million. The small gas field will
provide sales of $2.5 million every year forever at an annual cost of
$500,000. If you decide not to exploit the natural gas, you can sell the
land immediately for other use at a price of $17 million. Assume a cost of
capital of 10%.
. Illustrate the situation in a decision tree.
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