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Option to abandon Suppose that we are drilling an oil well. The drilling rig costs $300 today and in one year the well is either

  1. Option to abandon

Suppose that we are drilling an oil well. The drilling rig costs $300 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 time one is $575.
  • The PV of the unsuccessful payoff at time one is $0. If the salvage value of the drilling rig equal to $250.

Estimate the NPV of this project considering the option to abandon and it is value?

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