Question
Wildcat Oil is evaluating the decision to drill wells at the perimeter of an existing oil field. Each well will cost $9.5 million to drill
Wildcat Oil is evaluating the decision to drill wells at the perimeter of an existing oil field. Each well will cost $9.5 million to drill and the company expects to drill 20 of these wells. Even though the perimeter wells are being drilled adjacent to an existing oil field, there is a 40 percent probability that any particular perimeter well will come up dry, in which case no oil will be found at that well. If the well does produce oil, there is a 25 percent chance that the well will produce 25,000 barrels per year and a 75 percent chance that the well will produce 130,000 barrels per year. The producing wells will last for 7 years and the oil will create an aftertax cash flow of $45 per barrel. The required return on the project is 15 percent. What is the NPV of the decision to drill the perimeter wells? (The NPV is $ 43,087,515.59 but can you show me how to get that answer?)
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