Bundle: Financial Management: Theory & Practice, 16th + MindTap, 1 term Printed Access Card
16th Edition
ISBN: 9780357252673
Author: Brigham, Eugene F., EHRHARDT, Michael C.
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 26, Problem 2P
a.
Summary Introduction
To calculate:
b.
Summary Introduction
To calculate: The NPV if company invest after 2 years.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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%. Use the Black-Scholes model to estimate the value of the option. Assume the variance of the project's rate of return is 0.632 and that the risk-free rate is 5%. Do not round intermediate calculations. Enter your…
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 11%.
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…
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…
Chapter 26 Solutions
Bundle: Financial Management: Theory & Practice, 16th + MindTap, 1 term Printed Access Card
Knowledge Booster
Similar questions
- The Engler Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $9 million today. Engler estimates that once drilled, the oil will generate positive cash flows of $3.5 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, it recognizes that if it waits 2 years, it will have more information about the local geology as well as the price of oil. Engler estimates that if it waits 2 years, the project will cost $12 million, and cash flows will continue for 4 years after the initial investment is made. Moreover, if it waits 2 years, there is a 75% chance that the cash flows will be $4.0 million a year for 4 years, and there is a 25% chance that the cash flows will be $2.0 million a year for 4 years. Assume that all cash flows are discounted at 11%. If the company chooses to drill today, what is the project’s expected net present…arrow_forwardThe Bush Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $6 million today. Bush estimates that once drilled, the oil will generate positive 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, it recognizes that if it waits 2 years, it will have more information about the local geology as well as the price of oil. Bush estimates that if it waits 2 years, the project will cost $8 million, and cash flows will continue for 4 years after the initial investment is made. Moreover, if it waits 2 years, there is a 70% chance that the cash flows will be $4.3 million a year for 4 years, and there is a 30% chance that the cash flows will be $2.2 million a year for 4 years. Assume that all cash flows are discounted at 9%. 1. If the company chooses to drill today, what is the project's expected net present value?u 2.…arrow_forwardThe Bush Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $450 million today. Bush estimates that once drilled, the oil will generate positive cash flows of $215 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, it recognizes that if it waits 2 years, it will have more information about the local geology as well as the price of oil. Bush estimates that if it waits 2 years, the project will cost $600 million, and cash flows will continue for 4 years after the initial investment is made. Moreover, if it waits 2 years, there is a 95% chance that the cash flows will be $220 million a year for 4 years, and there is a 5% chance that the cash flows will be $120 million a year for 4 years. Assume that all cash flows are discounted at 11%. 1. Would it make sense to wait 2 years before deciding whether to drill? Explain(100 words)arrow_forward
- The Bush Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $450 million today. Bush estimates that once drilled, the oil will generate positive cash flows of $215 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, it recognizes that if it waits 2 years, it will have more information about the local geology as well as the price of oil. Bush estimates that if it waits 2 years, the project will cost $600 million, and cash flows will continue for 4 years after the initial investment is made. Moreover, if it waits 2 years, there is a 95% chance that the cash flows will be $220 million a year for 4 years, and there is a 5% chance that the cash flows will be $120 million a year for 4 years. Assume that all cash flows are discounted at 11%. 1. What is the value of the investment timing option? 2. What disadvantages might arise…arrow_forwardThe Engler Oil Company is deciding whether to drill for oilon a tract of land that the company owns. The company estimates that the project will cost$9 million today. Engler estimates that once drilled, the oil will generate positive cash flowsof $4.3 million a year at the end of each of the next 4 years. Although the company is fairlyconfident about its cash flow forecast, it recognizes that if it waits 2 years, it will have moreinformation about the local geology as well as the price of oil. Engler estimates that if itwaits 2 years, the project will cost $12 million, and cash flows will continue for 4 years afterthe initial investment is made. Moreover, if it waits 2 years, there is a 95% chance that thecash flows will be $4.4 million a year for 4 years, and there is a 5% chance that the cash flowswill be $2.4 million a year for 4 years. Assume that all cash flows are discounted at 11%.a. If the company chooses to drill today, what is the project’s expected net present value?b. Would…arrow_forward7. 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…arrow_forward
- 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?arrow_forwardPilipinas-Shell, Inc. is contemplating whether to drill for oil source on a tract of land that the company had purchased 10 years ago. The investment required for this project is PhP450.0 million. If the project is pursued, it is expected to bring in cash flows of PhP215.0 million annually for the next four years. With the limited market information available to support the financial forecast, the firm is considering of waiting 2 years before implementing the project until more reliable geology information as well as oil prices be made available. If the firm opt to wait for 2 years, the project will cost PhP600.0 million then cash flows will be expected to continue for 4 years after the initial investment. In addition, if the firm waits for 2 years, there is only 95% chance that expected cash flows will be at PhP220.0 million annually for 4 years. Contrary, there is the 5% chance that the cash flows will be at PhP120.0 million annually for 4 years. The firm used the 11% WACC for this…arrow_forwardBullock Gold Mining is evaluating a new gold mine in South Dakota. All of the analysis has been done and the CFO has forecast some of the relevant cash flow information. If BGM opens the mine, it will cost $635 million today (Time 0) and it will have a cash outflow nine years from today (Time 9) of $45 million in costs related to closing the mine and reclaiming the area around. Of the initial costs, BGM will depreciate $500 million over 8 years using straight line method. Expected earnings before taxes for the eight years of operation are shown below. BGM has a required rate of return for all of its gold mines of 12%. Earnings before taxes (in $1,000s): 0 1 2 3 4 5 6 7 8 9 37,857.14 60,714.29 96,428.57 157,857.1 203,571.4 132,142.9 117,857.1 85,000.00 Find the relevant cash flows for each of the relevant periods (Time 0 – Time 9). Calculate the NPV, IRR and Payback Period for the cash flows and indicate whether BGM should…arrow_forward
- 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?arrow_forwardThe 123 company is thinking whether to drill for oil source on a land that they had bought 10 years ago. For this project, it required a 400 million dollars. If they decided to pursue this project, the expected cash that it would bring is 215 million dollar annually for the next 4 yrs. Since their is a limited market information available to support the forecast of financial, 123 company is considering to wait 2 years before implementing the project until more reliable geology information as well as oil prices be made available. If the company opt to wait for 2 years, the project will cost them 600 million dollars then cash flows will be expected to continue for 4 years after the initial investment. In addition, if the 123 company waits for 2 years, there is only 95% chance that expected cash flows will be at 220.0 million dollars annually for 4 years. Contrary, there is the 5% chance that the cash flows will be at PhP120.0 million annually for 4 years. The company used an 11% WACC for…arrow_forwardChî Mining Corporative is set to open a gold mine in Mansa. According to the evaluations made this far, the mine will cost 900,000 to open and will have an economic life of 11 years. It will generate a cash inflow of 175,000 at the end of the first year, and the cash inflows are projected to grow at 8% per year for the next 10 years. It is projected that the mine will be abandoned in the 11th year. Abandonment costs are expected to be 125,000 at the end of year 11. The required return for the investors is 10%. Using the internal rate of return (IRR), Should the mine be opened?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT