B&G Mining and Exploration has just secured the mineral rights to a large parcel of land with abundant oil reserves. If B&G starts drilling immediately with the current drilling rig technology, it perceives a 40% chance of success. Alternatively, B&G can postpone drilling for 3 years while working on a new custom drilling rig that is specially designed to exploit this particular reserve pool. It is believed that the custom rig will increase the chance of success to 70%. If successful, the present value of the expected payoff is $31.1 million. If unsuccessful, the present value of the expected payoff is $7 million. The present value cost of the custom drilling rig is $1.27 million. B&Gs cost of capital is 11%.

What is the NPV of drilling immediately?

What is the NPV of manufacturing the custom rig and postponing drilling?