6. (2.5 pts)An integrated oil company is evaluating the exploration and development of an oil field.Initial investment of $100 mil is needed for start-up costs. After a year of start-up, three levels of oil are expected to be uncovered. There is a 20% chance of getting a high level with expected annual FCFF of $25 mil for 20 years; a 60% chance that annual FCFF will be $15 mil for 20 years; and a 20% chance that the operation will be unsuccessful and produce $-6 mil annual FCFF for 20 years. (Note all the expected FCFFs start from year 2.) Assume the cost of capital is 10%.

(Note: Please show your work to get full credit). Do not use excel.

A. What is the NPV of the project ignoring any option?

B. If project can be abandoned at the end of the start-up phase after the outcome is revealed, what is the NPV with this abandon option?Assumingthe cost of shutting down the operation is $5 million.

C. What is the value of the option?