Aramco is considering a well. Based on past experience they know there is a 60% chance the well will be a dry hole. If it strikes oil, the present value of the oil reserve is projected to be either 2,000 with a 50% chance or 3,0000 with a 50% chance. The initial cost to drill is $1,400. The risk free rate is 5%, Should the company drill?

Answer rating: 100% (QA)

Expected NPV probability of success x expected cash inflo... View the full answer