An oil company executive is considering investing $$11\mathrm{.}8$ million in one or both of two wells: well $1$ is

expected to produce oil worth $$3\mathrm{.}18$ million a year for $10$ years; well $2$ is expected to produce $$2\mathrm{.}18$ million

for $15$ years. These are real $($inflation$-$adjusted$)$ cash flows.

The beta for producing wells is $0\mathrm{.}81.$ The market risk premium is $7\%,$ the nominal risk$-$free interest rate is $6\%,$

and expected inflation is $5\%.$

The two wells are intended to develop a previously discovered oil field. Unfortunately there is still a $11\%$

chance of a dry hole in each case. A dry hole means zero cash flows and a complete loss of the $$11\mathrm{.}8$

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 $2$ decimal places.$)$

b$.$ The oil company executive proposes to add $20$ 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, re$-$enter the NPVs from your

answers in Part B for both wells. If they are incorrect, re$-$calculate 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.$)$

Well $2$ NPV