The Karns Oil Company is deciding whether to dnil for oil on a tract of land that the compamy owns. The company estimates the project would cost \$8 million today, Karns estimates that, once drilled, the oil will generate positive net cash flows of$4million 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 obout the price of oil. Karns estimates that if it waits 2 years then the project would cost$9million. Moreover, if it waits 2 years, then there is a90%chance that the net cash flows would be$4.2millian a year for 4 vears and a10%chance that they would be$2.2million a year for 4 years. Assume all cash flows are discounted at10%. Use the Black-Schoies model to estimate the value of the option. Assume the vanance of the projectis rate of retiurn is 0.632 and that the nsk free rate is6%. Do not round intermediate calculabons. Enter your answer in millions. Foc example, an anwwer of$1.234million should be entered as 1.234 , not 1,234,000. Round your anwwor to three decimal places.$_____million
Investment Timing Option: Option Analysis The Karns Oil Company is deciding whether to dnil for oil on a tract of land that the compamy owns. The company estimates the project would cost \$8 million today, Karns estimates that, once drilled, the oil will generate positive net cash flows of$4million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow
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