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Investment Timing Option: Decision-Tree Analysis The Kams Oil Company is deciding whether to drill for oil on a tract of land that the company owns.
Investment Timing Option: Decision-Tree 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. Karns estimates that; once dnilled, the oil will generate positive net cash flows of $4 miltion a year at the end of each of the next 4 years. Although the company is foirly confident about its cash flow forecast, in 2 years it will have more information about the local geology and about the price of oil. Karns estimates that if it waits 2 years then the project would cost $9 millioa. Moreover, if it waits 2 years. then there is a 90% charce 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 millian a year for 4 years. Assume all cash flows are discounted at 11%. a. If the company chooses to drill today, what is the project's net present value? Do not round intermediate calculations. Enter your answer in milions. For example, an answer of $1.23 million should be entered os 1.23 , not 1,230,000, Round your answer to two decimal places $ milion b. Usine decision-tree analysis, does it make sense to wait 2 years before deciding whether to dnil
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