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Suppose that we are drilling an oil well. The drilling rig costs $ 1 8 0 0 today, and in one year the well is
Suppose that we are drilling an oil well. The drilling rig costs $ today, and in one year the well is either a success or a failure. The outcomes are equally likely. The discount rate is The PV of the successful payoff at time one is $ The PV of the unsuccessful payoff at time one is $ Now, we know that the rig can be sold for $ in a year. When we include the value of the option to abandon, the NPV of this drilling project should be keep two decimal places:
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