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Value of the test You midrange guess as to the amount of oil in a prospective field is 10 million barrels, but in fact there
- Value of the test
You midrange guess as to the amount of oil in a prospective field is 10 million barrels, but in fact there is a 50% chance that the amount of oil is 15 million barrels and a 50% chance of 5 million barrels. If the actual amount of oil is 15 million barrels, the present value of the cash flows from drilling will be $8 million. If the amount is only 5 million the present value of the cash flows from drilling will be $2 million. If the investment in well will cost you $3 million;
- Estimate the NPV of this project?
- If you can run a seismic test costing $100,000 that can verify the amount of oil under the ground. Is it worth paying for the test?
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