eBookVideoInvestment Timing Option: Decision-Tree AnalysisThe 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 $8 milliontoday. Kams estimates that, once drilled, the oil will generate positive net cash flows of $4 million a year at the end of each of the next 4 years. Although thecompany 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 oill. Karmsestimates that if it waits 2 years then the project would cost $9 million. Moreover, if it waits 2 years, then there is a 90 % chance that the net cash flows wouldbe $4.2 million a year for 4 years and a 10% chance that they would be $2.2 million a year for 4 years. Assume all cash flows are discounted at 8%.a. If the company chooses to drill today, what is the project's net present value? Do not round intermediate calculations. Enter your answer in millions. Forexample, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places.million$b. Using decision-tree analysis, does it make sense to walt 2 years before deciding whether to drill?-Select-Check My Work (5 remaining)

If a Project yields an equivalent amount of cash inflows every year, then the Present value of these…

Answered: The Karns Oil Company is deciding…

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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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 $8 million today. Karns estimates that, once drilled, the oil will generate positive net cash flows of $4 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 $9 million. Moreover, if it waits 2 years, then there is a 90% chance that the net cash flows would be $4.2 million a year for 4 years and a 10% chance that they would be $2.2 million a year for 4 years. Assume all cash flows are discounted at 10%. a. If the company chooses to drill today, what is the project's net present value? Do not round intermediate calculations. Enter your answer in millions. For…
7. The Alaska Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project would cost $5.6 million today. The firm estimates that once drilled, the oil will generate positive cash flows of $2.8 million a year at the end of each of the next four years. While the company is fairly confident about its cash flow forecast, it recognizes that if it waits two years, they would have more information about the local geology as well as the price of oil. Alaska Oil estimates that if it waits two years, the project would cost $6.3 million. Moreover, if it waits two years, there is a 90% chance that the cash flows would be $2.94 million a year for four years, and there is a 10% chance that the cash flows will be $1.54 million a year for four years. Assume that all cash flows are discounted at a 10% WACC. If the company chooses to drill today, what is the project's net present value (in millions)? a. $2.3134 b. $2.9875 c. $3.2756…
(Please answer in Excel Format and demonstrate how you got the answer so I can better understand). A firm is planning a new oil and gas project that is estimated to yield cash flows of -$89 million per year in Year 1 through Year 3, $59 million per year in Years 4 through 5, and $95 million in Years 6 through 9, and $135 million in Years 10 through 15. This investment will cost the company $285 million today (initial outlay). We assume that the firm's cost of capital is 7.5%. (1) Draw a time line to show the cash flows of the project. (2) Compute payback period, net present value (NPV), profitability index (PI), internal rate of return (IRR), and modified internal rate of return (MIRR). (3) Discuss whether the project should be taken or not.
Brett Collins is reviewing his company's investment in a cement plant. The company paid $16,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company's desired rate of return for present value computations is 10 percent. Expected and actual cash flows follow: (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Expected Actual Year 1 $3,310,000 2,600,000 Required Year 2 $5,090,000 2,980,000 Year 3 $4,560,000 4,860,000 Year 4 $5,090,000 3,810,000 Year 5 $4,290,000 3,540,000 a.&b. Compute the net present value of the expected and actual cash flows as of the beginning of the investment. Note: Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answers to the nearest whole dollar.
Brett Collins is reviewing his company's investment in a cement plant. The company paid $15.500,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company's desired rate of return for present value computations is 10 percent. Expected and actual cash flows follow: (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Expected Actual Year 1 $3,380,000 2,700,000 Year 2 $4,950,000 3,060,000 Net present value (expected) Net present value (actual) Year 3 $4,580,000 4,900,000 Year 4 $5,040,000 Year 5 $4,250,000 3,860,000 3,530,000 Required a.&b. Compute the net present value of the expected and actual cash flows as of the beginning of the investment. Note: Negative amounts should be Indicated by a minus sign. Round your Intermediate calculations and final answers to the nearest whole dollar.
someone solve this but not use excel
The Merriweather Printing Company is trying to decide on the merits of constructing a new publishing facility. The project is expected to provide a series of positive cash flows for each of the next four years. The estimated cash flows associated with this project are as follows: Year. Project cash flow 0 ? 1 $810,000 2 $390,000 3 $260,000 4 $460,000 If you know that the project has a regular payback of 2.4 years, what is the projects IRR?
Ubu Manufacturing Company is purchasing a production facility at a cost of $40 million. The company expects the project to generate annual net cash flows of $8 million over the next 6 years. Its cost of capital is 10.8 per cent. What is the net present value of this project? Round your answer to 2 decimal places. E.g. if the final value is $12345.8342, please type 12345.83 in the answer box (do not type the dollar sign).
F2.
Two mutually exclusive alternatives A and B are being considered: Year A 1 A 2 0 1 -$2500 $746 -$6000 $1664 2 3 4 5 $746 $746 $746 $746 $1664 $1664 $1664 $1664 The minimum attractive rate of return is 8%. After calculation we can find that the internal rates of return: for A 1, IRRA1 = 17%, for B, IRRA2 = 14% and for A 2-A 1, IRRA2-A1 = 9.8%. Which of the following statements is correct? Select A 1 because IRRA 1 > IRRA 2 Select neither A 1 nor A 2 because IRRA 1 > MARR and IRRA 2 > MARR Select A 1 because IRRA 2-A 1 > MARR select A 2 because IRR 2-1 > MARR
Please answer ASAP....
Rakesh bhapa

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