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Problem 2 (15pt): An oil field has a 40% probability of being rich, a 30% probability of being normal, and a 30% probability of being
Problem 2 (15pt): An oil field has a 40% probability of being rich, a 30% probability of being normal, and a 30% probability of being poor. In each case, it will produce cash inflows of $5 million, $3 million, and $1 million per year, respectively, for 15 years starting from 2 years after an oil well is drilled. Drilling a well costs $15 million. If you spend $1 million testing the oil field, then after 2 years you will learn whether the oil field is rich, normal, or poor, and you can decide whether or not to drill. The MARR is 10% per year. a) (10pt) Find the expected net present value when you do the test now. b) (5pt) Find the value of doing the test
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