Investment timing option

Investment Timing Option: Option Analysis The Kams Oil Company iS deciding Whether to drill for Oil on a tract Of land that the company owns. The company estimates the project would COSt $8 million today. Kams estimate-S that, once drilled, the Oil Will generate positive net cash flows Of $4 million a year at the end Of each Of the next 4 gears. Although the company iS fairly confident about its cash forecast, in 2 years it Will have more information about the local geology and about the price Of Oil. Kams estimates that if it Waits 2 years then the project would COSt $9 million. Moreover, if it Waits 2 years, then there iS a chance that the net cash flows would be $4.2 million a year for 4 years and a 10% chance that they would be $2.2 million a year for 4 gears. Assume all cash flows are discounted at 10%. use the Black-Scholes model to estimate the value the option. Assume the Variance Of the project'S rate Of return iS 0.111 and that the risk-free rate iS 7%. DO not round intermediate calculations. Enter your answer in millions. For example, an answer Of $1,234 million Should be entered as 1.234, not Round your answer to three decimal places. million