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An oil company executive is considering investing $ 1 1 . 5 million in one or both of two wells: well 1 is expected to
An oil company executive is considering investing $ million in one or both of two wells: well is expected to produce oil worth $ million a year for years; well is expected to produce $ million for years. These are real inflationadjusted cash flows. The beta for producing wells is The market risk premium is the nominal riskfree interest rate is and expected inflation is The two wells are intended to develop a previously discovered oil field. Unfortunately there is still a chance of a dry hole in each case. A dry hole means zero cash flows and a complete loss of the $ million investment. Ignore taxes and make further assumptions as necessary. a What is the correct real discount rate for cash flows from developed wells? Do not round intermediate calculations. Enter your answer as a percent rounded to decimal places. b The oil company executive proposes to add percentage points to the real discount rate to offset the risk of a dry hole. Calculate the NPV of each well with this adjusted discount rate. Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in dollars not in millions and round your answers to the nearest whole dollar amount. c Are the NPVs calculated in Part B the correct NPVs If they are correct, reenter the NPVs from your answers in Part B for both wells. If they are incorrect, recalculate the NPVs to the correct values for both wells. Do not round intermediate calculations. Enter your answers in dollars not in millions and round your answers to the nearest whole dollar amount.
An oil company executive is considering investing $ million in one or both of two wells: well is expected to produce oil worth $ million a year for years; well is expected to produce $ million for years. These are real inflationadjusted cash flows.
The beta for producing wells is The market risk premium is the nominal riskfree interest rate is and expected inflation is
The two wells are intended to develop a previously discovered oil field. Unfortunately there is still a chance of a dry hole in each case. A dry hole means zero cash flows and a complete loss of the $ million investment.
Ignore taxes and make further assumptions as necessary.
a What is the correct real discount rate for cash flows from developed wells? Do not round intermediate calculations. Enter your answer as a percent rounded to decimal places.
b The oil company executive proposes to add percentage points to the real discount rate to offset the risk of a dry hole. Calculate the NPV of each well with this adjusted discount rate. Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in dollars not in millions and round your answers to the nearest whole dollar amount.
c Are the NPVs calculated in Part B the correct NPVs If they are correct, reenter the NPVs from your answers in Part B for both wells. If they are incorrect, recalculate the NPVs to the correct values for both wells. Do not round intermediate calculations. Enter your answers in dollars not in millions and round your answers to the nearest whole dollar amount.
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