The Engler Oil Company is deciding whether to drill for oil on a tract of land...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The Engler Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $6 million today. Engler estimates that once drilled, the oil will generate positive cash flows of $3.5 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, it recognizes that if it waits 2 years, it will have more information about the local geology as well as the price of oil. Engler estimates that if it waits 2 years, the project will cost $9 million, and cash flows will continue for 4 years after the initial investment is made. Moreover, if it waits 2 years, there is a 75% chance that the cash flows will be $4.0 million a year for 4 years, and there is a 25% chance that the cash flows will be $2.0 million a year for 4 years. Assume that all cash flows are discounted at 8%. a. If the company chooses to drill today, what is the project's expected net present value? Enter your answer in millions. For example, an answer of $1.2345 million should be entered as 1.2345, not 1,234,500. Do not round intermediate calculations. Round your answer to four decimal places. $ 5.592 million b. Would it make sense to wait 2 years before deciding whether to drill? Enter your answer in millions. For example, an answer of $1.2345 million should be entered as 1.2345, not 1,234,500. Do not round intermediate calculations. Round your answer to four decimal places. NPV of waiting: $ 2.223 No million because the NPV of waiting two years is less than going ahead and proceeding with the project today. c. What is the value of the investment timing option? Enter your answer in millions. For example, an answer of $1.2345 million should be entered as 1.2345, not 1,234,500. If an amount is zero, enter 0. Do not round intermediate calculations. Round your answer to four decimal places. $ 2.732 million The Engler Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $6 million today. Engler estimates that once drilled, the oil will generate positive cash flows of $3.5 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, it recognizes that if it waits 2 years, it will have more information about the local geology as well as the price of oil. Engler estimates that if it waits 2 years, the project will cost $9 million, and cash flows will continue for 4 years after the initial investment is made. Moreover, if it waits 2 years, there is a 75% chance that the cash flows will be $4.0 million a year for 4 years, and there is a 25% chance that the cash flows will be $2.0 million a year for 4 years. Assume that all cash flows are discounted at 8%. a. If the company chooses to drill today, what is the project's expected net present value? Enter your answer in millions. For example, an answer of $1.2345 million should be entered as 1.2345, not 1,234,500. Do not round intermediate calculations. Round your answer to four decimal places. $ 5.592 million b. Would it make sense to wait 2 years before deciding whether to drill? Enter your answer in millions. For example, an answer of $1.2345 million should be entered as 1.2345, not 1,234,500. Do not round intermediate calculations. Round your answer to four decimal places. NPV of waiting: $ 2.223 No million because the NPV of waiting two years is less than going ahead and proceeding with the project today. c. What is the value of the investment timing option? Enter your answer in millions. For example, an answer of $1.2345 million should be entered as 1.2345, not 1,234,500. If an amount is zero, enter 0. Do not round intermediate calculations. Round your answer to four decimal places. $ 2.732 million
Expert Answer:
Related Book For
Fundamentals of Financial Management
ISBN: 978-1337395250
15th edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
Students also viewed these finance questions
-
The Engler Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $9 million today. Engler estimates that once...
-
The Bush Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $8 million today. Bush estimates that once...
-
Is an oil pipeline a simplex system, a half-duplex system, a full-duplex system, or none of the above? What about a river or a walkie-talkie-style communication?
-
In what ways is using a name server better than using static host tables? What problems or complications are associated with name servers? What methods could you use to decrease the amount of traffic...
-
The Village Hat Shop Limited counted the entire inventory in its store on August 31 and arrived at a total inventory cost of $95,000. The count included $7,500 of inventory held on consignment for a...
-
What is the name for a diagram of who eats whom in a community?
-
Gary Wilcox opened Garys Cosmetic Market on October 1. A 4% sales tax is calculated and added to all cosmetic sales. Gary offers no sales discounts. The following transactions occurred in April: 201X...
-
In a school with 968 students, any group of two students may wish to communicate in private. Using a private-key cryptosystem, how many keys would need to be created?
-
What is the role of Risk Management, transparency, traceability and real-time communication/information flow in Supply chain operations? How Industry 4.0 technologies in achieving them, give examples...
-
A company uses Dynamics 365 Supply Chain Management. The company has received a purchase order from a vendor. All lines were received and invoiced. One specific line for 100 quantities had half of...
-
Briefly discuss the main advantages of attaining the precise operational risk appetite and indicators?
-
A series RC circuit consists of 12-V battery, a 2.00 mF capacitor, a 1000 Resistor and a switch. When the switch is closed how long does it take for the current to reach one tenth its maximum value?
-
How many sales transactions do we have for US? How many for DE? US has 84,194 sales transactions, while DE has 86,816 transactions
-
Capacitors of values 6.0mF and 9.0mF are connected in series to a 30.0 V power supply. What is the resulting potential difference across the 9.0 mF capacitor?
-
Kennal Company reported the following information. Based on this information, purchases for the next period should be what? Cost of Goods Sold (estimated for next period). $300,000 Ending Inventory...
-
State whether each statement is true or false. If false, give a reason. {purple, green, yellow} = {green, pink, yellow}
-
Nestls financial statements are presented in Appendix B. Financial statements of Delfi Limited are presented in Appendix C. Instructions Refer to the financial statements and answer the following...
-
Writing Financial statement information about four different companies is as follows. Instructions a. Determine the missing amounts. (Hint: For example, to solve for (a), Assets Liabilities = Equity...
-
The financial statements of TSMC are presented in Appendix A. The complete annual report, including the notes to the financial statements, is available at the companys website. Instructions Refer to...
Study smarter with the SolutionInn App