Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. the karns oil company is deciding whether to drill

The Karns Oil Company is deciding whether to drill for oil on a tract of...

50.1K

Verified Solution

Question

Finance

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 $16 million today. Karns estimates that, once drilled, the oil will generate positive net cash flows of $8 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 $17 million. Moreover, if it waits 2 years, then there is a 90% chance that the net cash flows would be $8.4 million a year for 4 years and a 10% chance that they would be $4.4 million a year for 4 years. Assume all cash flows are discounted at 10%.

  1. 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 as 1.23, not 1,230,000. Round your answer to two decimal places.

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students