A wood manufacturing is looking for a new forest.. They spend $12 million initially in survey attempts.
Question:
A wood manufacturing is looking for a new forest.. They spend $12 million initially in survey attempts. There is a 40% chance that they can locate a suitable site using these surveys. If they cannot, they lose the initial investment. If they locate a site, they will begin digging in year 1.
It will cost $112 million in year 1 and year 2 to explore the site. There is a 50% chance that after year 2, they have a productive forest generating $51 million a year for the next 15 years. There is a 30% chance they have a productive forest that generates $33 million a year for the next 10 years.
There is a 20% chance the mine is a bust and they must abandon it for an additional $25 million in year 3.
Draw the timeline and decision tree for the problem.
Calculate the probabilities for all scenarios.
What is the NPV if the discount rate is 10%? What is the NPV if the discount rate is 5%?
Financial Algebra advanced algebra with financial applications
ISBN: 978-0538449670
1st edition
Authors: Robert K. Gerver