There is a 16% chance that the amount of oil in a prospective field is 5 million barrels and a 84% chance of 14 million barrels. If the actual amount of oil is 5 million barrels, the present value of the cash flows from drilling will be $2 million. If the amount is 14 million barrels, the present value will be $9.5 million. The cost to drill the well is $4 million. Suppose, a test that costs $275,000 can verify the amount of oil under the ground, is it worth paying for the test? Please enter the full number as your answer. (i.e., 10,000,000 and NOT 10 million) What is the net present value of not testing? Number What is the net present value of testing? Number Should the company perform the test to verify the amount of oil under the ground? No Test Test

There is a 16% chance that the amount of oil in a prospective field is 5 million barrels and a 84% chance of 14 million barrels. If the actual amount of oil is 5 million barrels, the present value of the cash flows from drilling will be $2 million. If the amount is 14 million barrels, the present value will be $9.5 million. The cost to drill the well is $4 million. Suppose, a test that costs $275,000 can verify the amount of oil under the ground, is it worth paying for the test? Please enter the full number as your answer. (i.e., 10,000,000 and NOT 10 million) What is the net present value of not testing? Number What is the net present value of testing? Number Should the company perform the test to verify the amount of oil under the ground? No Test Test

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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An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $12 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t 1 of $14.4 million. Under Plan B, cash flows would be $2.1323 million per year for 20 years. The firm's WACC is 12.8%. a. Construct NPV profiles for Plans A and B. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. If an amount is zero, enter "0". Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places. Discount Rate NPV Plan A NPV Plan B 0% $ million $ million 5 million million 10 million million 12 million I million 15 million 17 20 million million million million million Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places. Project A: % Project B: % Find the crossover…
General Forge and Foundry Co. is considering a three-year project that will require an initial investment of $40,000. If market demand is strong, General Forge and Foundry Co. thinks that the project will generate cash flows of $29,500 per year. However, if market demand is weak, the company believes that the project will generate cash flows of only $1,750 per year. The company thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 10%, what will be the expected net present value (NPV) of this project? -$914 -$972 -$1,143 -$1,257
You are analyzing a project with a 30-year lifetime, with the following characteristics: ● The project will require an initial investment of RM20 million and additional investments of RM5 million in year 10 and RM5 million in year 20. ● The project will generate earnings before interest and taxes of RM3 million each year (The tax rate is 40%) ● The depreciation will amount to RM500,000 each year, and the salvage value of equipment will be equal to the remaining book value at the end of year 30. ● The cost of capital is 12.5% i) Estimate the net present value of this project. ii) Estimate the internal rate of return of this project. What might be some of the problems in estimating the IRR for this project?
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 $4 million today. Karns estimates that, once drilled, the oil will generate positive net cash flows of $2 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 $5 million. Moreover, if it waits 2 years, then there is a 90% chance that the net cash flows would be $2.1 million a year for 4 years and a 10% chance that they would be $1.1 million a year for 4 years. Assume all cash flows are discounted at 8%. 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 example, an answer of $1.23 million should be entered…
Herman Co. is considering a four-year project that will require an initial investment of $5,000. The base-case cash flows for this project are projected to be $12,000 per year. The best-case cash flows are projected to be $20,000 per year, and the worst-case cash flows are projected to be –$1,000 per year. The company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. What would be the expected net present value (NPV) of this project if the project’s cost of capital is 13%?
The Drillago Company is involved in searching for locations in which to drill for oil. The firm’s current project requires an initial investment of $15 million and has an estimated life of 10 years. The expected future cash inflows for the project are as shown in the following table: Year Cash inflows 1 $ 600,000 2 1,000,000 3 1,000,000 4 2,000,000 5 3,000,000 6 3,500,000 7 4,000,000 8 6,000,000 9 8,000,000 10 12,000,000 The firm’s current cost of capital is 13%. TO DO Create a spreadsheet to answer the following: Calculate the project’s net present value (NPV). Is the project acceptable under the NPV technique? Explain. \ Calculate the project’s internal rate of return (IRR). Is the project acceptable under the IRR technique? Explain. In this case, did the two methods produce the same results? Generally, is there a preference between the NPV and IRR techniques? Explain. d. Calculate the payback period for the…
An exploration well in a prospect has a cost of $10 milion and a chance of discovery of 20%. What is the minimum NPV in millions of dollars that this prospect must generate to justify the well? Input your answer in the space provided.
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…
The Reiph Transportation Company is planning to buy a new fleet of trucks requiring an initial investment of $1,000,000, and $2,500,000 annually to maintain and operate. The expected life of the new fleet is 10 years. The revenue is estimated to be $5,000,000 per year and the salvage value is expected to be $250,000. The MARR is 18%. Conduct a sensitivity analysis based on the given information. a. Calculate the PW of the Base case based on above given data. (Do not use AW or FW) b. Calculate the PW for the range of -10% to +15% for initial cost. (Do not use AW or FW)
Can you answer this queston from the image below. Determine the crossover rate. Approximate your answer to the nearest whole number.
Suppose you have a project that will cost $800,000 last for ten years. The cash flows for each year have an expected value of $175,000 with a standard deviation of $20,000. The cost of capital is 10%. Use a Monte Carlo simulation with 1,000 replications to evaluate this project using the NPV and IRR approaches. USE EXCEL AND EXPLAIN EACH STEP
A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $108,168,164 now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project’s NPV? 10.6.1 nn

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