Dirger Exploration, Inc. is considering an investment in a project that is expected to have a five year life. The investment would require the Company to drawelat a cost of $3.0 millon. Diger's hurdle rate is 20 percent The expected outcomes as a result of the drilling are: High volume: 50% probability-could produce up to 725,000MM Bus each year for five years Medium volume: 30% probability could produce up to 350,000MM each year for five years Dry hole: 20% probability of the wells sucess, the Company would have to make a decision as to whether to build a small or large processing plant. A large processing plant would cost $1,000,000 construct and could process up to 710,000 MM us each year for five years. Asmal processing plant would cost $500,000 to construct and could process to 525.000 MM each year for five year The amount of gas that can be five years whereas a perm i High volume (Good Marted: 75% Medium volume (Poor Market: 25% e en on the very of the market of the wel proves to be the Company 710.000 MM B ach year for the Company's stonested 450 000 MM each year for five years. The probates of the mattype are as follows: t Finally, the price received a who dependent on the favorability of the market. The Company believes it will receive $2.75 per MM poor market in a good market but only $2.40 per MM Required: 1. Calculate the NPVs for Options 1.2184 2. Construct a decision tree, in good form, that is the 10 possible outcomes 3. What your recommendationes the Company dr the well? If so, what are of a processing plant do you recommend? What is the expected value of your recommendation FinancialFactors Table FV of $ 1 FVOA S1 Probability 1.000000 03 4 5 6 7 Capital well dage processing plant d al processing plant 3.800,000 1.000.000 3. SOO 441.600 0578704 0.42253 0.017 24 7 9 Volumes that can be produced 10 h 11 Medu 12 Dryde 725.000 550.000 710.000 525.000 14 Volumes that can be processed 15 large plant 16 Smal plant 17 18 Volumes that can be sold in a 19 Good market 20 Poor market Small 710.000 450,000 Large Large 5 Yes 6 Yes 7 Yes B Yes Medium Medium Medium Medium Dry hole Small 22 Unt prices in a 23 Good market 24 (270,139) 3.000.000 Yes 10 No Dirger Exploration, Inc. is considering an investment in a project that is expected to have a five year life. The investment would require the Company to drawelat a cost of $3.0 millon. Diger's hurdle rate is 20 percent The expected outcomes as a result of the drilling are: High volume: 50% probability-could produce up to 725,000MM Bus each year for five years Medium volume: 30% probability could produce up to 350,000MM each year for five years Dry hole: 20% probability of the wells sucess, the Company would have to make a decision as to whether to build a small or large processing plant. A large processing plant would cost $1,000,000 construct and could process up to 710,000 MM us each year for five years. Asmal processing plant would cost $500,000 to construct and could process to 525.000 MM each year for five year The amount of gas that can be five years whereas a perm i High volume (Good Marted: 75% Medium volume (Poor Market: 25% e en on the very of the market of the wel proves to be the Company 710.000 MM B ach year for the Company's stonested 450 000 MM each year for five years. The probates of the mattype are as follows: t Finally, the price received a who dependent on the favorability of the market. The Company believes it will receive $2.75 per MM poor market in a good market but only $2.40 per MM Required: 1. Calculate the NPVs for Options 1.2184 2. Construct a decision tree, in good form, that is the 10 possible outcomes 3. What your recommendationes the Company dr the well? If so, what are of a processing plant do you recommend? What is the expected value of your recommendation FinancialFactors Table FV of $ 1 FVOA S1 Probability 1.000000 03 4 5 6 7 Capital well dage processing plant d al processing plant 3.800,000 1.000.000 3. SOO 441.600 0578704 0.42253 0.017 24 7 9 Volumes that can be produced 10 h 11 Medu 12 Dryde 725.000 550.000 710.000 525.000 14 Volumes that can be processed 15 large plant 16 Smal plant 17 18 Volumes that can be sold in a 19 Good market 20 Poor market Small 710.000 450,000 Large Large 5 Yes 6 Yes 7 Yes B Yes Medium Medium Medium Medium Dry hole Small 22 Unt prices in a 23 Good market 24 (270,139) 3.000.000 Yes 10 No
