Answered: What would be the value of deciding to…

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 company is deciding whether to drill a well for oil on a given piece land. Drilling now requires $8 million. The well is expected to yield revenues of $4 million annually for 4 years, after which the well will run dry. If the oil company waits 2 years, drilling will cost $9 million, with a 90% chance of oil revenues being $4.2 million annually and a 10% chance of oil revenues being $2.2 million annually, for 4 years. Assuming a discount rate of 10%

What would be the value of deciding to drill now?
What would be the value of waiting 2 years before deciding whether to drill?

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GeoSourcex is considering opening a new titanium mine. Once in operation, the mine is expected to produce positive net cash flows in perpetuity starting 3 years from now at $19.5 million per year but declining at a constant rate of 1.8% per year. The costs of getting the mine operational include an immediate payment of $110.0 million to purchase the land and acquire the mineral rights, plus other start -up costs of $10.0 million per year for three years starting in one year. If the project's cost of capital is 10.2% per year (compounded annually) what is the Net Present Value of this new mine?
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Monroe Printing is evaluating the pamphlet project. The project would require an initial investment of $73,300.00 that would be depreciated to $12,300.00 over 4 years using straight-line depreciation. The first annual operating cash flow of $18,000.00 is expected in 1 year, and annual operating cash flows of $18,000.00 are expected each year forever. Monroe Printing expects the project to have an after-tax terminal value of $108,700.00 in 3 years. The tax rate is 22.80%. What is X, the project's relevant expected cash flow for NPV analysis in year 3? $83,916.40 (plus or minus $10) $108,700.00 (plus or minus $10) $101,916.40 (plus or minus $10) $126,700.00 (plus or minus $10) None of the above is within $10 of the correct answer

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What would be the value of deciding to drill now? What would be the value of waiting 2 years before deciding whether to drill?