An oll company executive is considering Investing $$11\mathrm{.}8$ million In one or both of two wells: well $1$ is expected to produce oll worth $$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 oll 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 Intermedlate calculatlons. Enter your

answer as a percent rounded to $2$ decimal places.$)$

b$.$ The oll 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. $($Negatlve answers should be Indlcated by a minus sign. Do not round

Intermedlate 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 Intermedlate calculations. Enter your

answers in dollars not in millions and round your answers to the nearest whole dollar amount.$)$