Answered step by step
Verified Expert Solution
Question
1 Approved Answer
The Karns Oil Company is deciding whether to dril for oil on a tract of land that the company owns. The company eatimates the project
The Karns Oil Company is deciding whether to dril for oil on a tract of land that the company owns. The company eatimates the project would cost 53 mition today. Karns estimates that, once drilled, the oll will generate potitive net cash flows of 54m ilion a year at the end of each of the next 4 yeors. Although the company is fairly confident about its cash fiow forecart, In 2 years it wilk have more information about the local geology and about the price of oli. Karns estimates that if it waits 2 years then the project would cost 59 million, Moreover, if it waits 2 yoars, then there is a 90 . chance that the net cash fiowa would be s4. 2 million a year far 4 years and a 10 . chance thot they would be 52.2 million a year for 4 years. Assume all cash fiows are dircounted at 100 . Use the Biack-Scholed model to oatimate the value of the option. Assume the variance of the project's rote of return is 0.632 and that the risk-free rate is 8%. Do not round intermediate calculations. Enter your answer in miliont. For. example, an answer of 51.234 million should be entered as 1.234, not 1,234,000. Round your answer to three decimal piaces. 5 million
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started