Deep Sea Drilling is evaluating drilling for oil in the Gulf of Mexico. It will cost $830 million to buy an oil rig. Drilling would start immediately. The company has a cost of capital of 8%.

There is a 50% probability that the new well will be succcessful, in which case the free cash flow from the well will be $200 million per year for 20 years. Otherwise, it will only generate $40 milion per year for 10 years.

PART 1: What is the NPV of the project (in $ million)?

PART 2:In fact, the company can abandon the project after the first year and sell the oil rig for $664 million. What is the NPV of the project now (in $ million)?

PART 3:What is the value of the option (in $ million)?