Suppose that we are drilling an oil well. The drilling rig costs $1300 today, and in...

  

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Suppose that we are drilling an oil well. The drilling rig costs $1300 today, and in one year the well is either a success or a failure. The outcomes are equally likely. The discount rate is 4%. The PV of the successful payoff at time one is $3400. The PV of the unsuccessful payoff at time one is $0. Now, we know that the rig can be sold for $3000 in a year. When we include the value of the option to abandon, the NPV of this drilling project should be (keep two decimal places): Your Answer: Answer Suppose that we are drilling an oil well. The drilling rig costs $1300 today, and in one year the well is either a success or a failure. The outcomes are equally likely. The discount rate is 4%. The PV of the successful payoff at time one is $3400. The PV of the unsuccessful payoff at time one is $0. Now, we know that the rig can be sold for $3000 in a year. When we include the value of the option to abandon, the NPV of this drilling project should be (keep two decimal places): Your Answer: Answer

Answer rating: 100% (QA)

Calculate Expected Payoff Since success and failure are equally likely the expected payoff at the en... View the full answer