There is a 38% chance that the amount of oil in a prospective field is 6 million barrels and a 62% chance of 14 million barrels. If the actual amount of oil is 6 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 $7.5 million. The cost to drill the well is $4 million. Suppose, a test that costs $200,000 can verity the amount of oll under the ground, is it worth paying for the test? Please enter the full number as your answer. (.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 O Test

There is a 38% chance that the amount of oil in a prospective field is 6 million barrels and a 62% chance of 14 million barrels. If the actual amount of oil is 6 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 $7.5 million. The cost to drill the well is $4 million. Suppose, a test that costs $200,000 can verity the amount of oll under the ground, is it worth paying for the test? Please enter the full number as your answer. (.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 O Test

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 4MC

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