Question
There is a 50% chance that your oil field will yield 5 million barrels of oil and a 50% chance that the oil field will
There is a 50% chance that your oil field will yield 5 million barrels of oil and a 50% chance that the oil field will yield 15 million barrels of oil. If the actual amount of oil is 15 million barrels, the present value of the cash flows you will realize from selling the oil will be $8 million. If the amount of oil is only $5 million, the present value of the cash flows from selling the oil will be $2 million. It costs $3 million to drill a well. Suppose that a seismic test costing $100,000 can verify the amount of oil underground. Is it worth paying for the test? What is the value of this test? (5 points)
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