Given:

Investment I₀ = PV(I₁) = $20M

The present value of investment is assumed to be $20 million regardless of when investment is made.

• Price of oil (Uncertain)
• P = $15 or $25 with equal probability
• Variable production cost V = $8 per barrel
• E[production] = Q = 200,000 barrels/year
• Discount rate I = 10%
• Calculate:
  • NPV (invest today), NPV (wait 1 year), & compare