Question
Esso is drilling an oil well. The drilling rig costs $840 today, and in one year the well is either a success or a failure.
Esso is drilling an oil well. The drilling rig costs $840 today, and in one year the well is either a success or a failure. The outcomes are equally likely. The discount rate is 10%. The PV of the successful payoff at t=1 is $1,420. The PV of the unsuccessful payoff at t=1 is $0. However, in case of failure, the firm can abandon the rig and sells it for $480. What is the value of the abandonment option? (Hint: the value of the abandonment option is the difference between the NPV of the project with the abandonment option and the NPV of the project without the abandonment option)
A. $218.18
B. -$147.82
C.$145.60
D. $0.00
E. $82.55
Consider a five-year project with the following information: initial fixed asset investment = $720,000; straight-line depreciation to zero over the five-year life; zero salvage value; price = $32; variable costs = $15; fixed costs = $350,000; quantity sold = 70,000 units; tax rate = 25%. How sensitive is OCF to changes in quantity sold (i.e., the change in OCF given one unit increase in quantity)?
A. $11.65
B. $12.75
C. $12.30
D. $11.95
E. $13.05
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