Youve struck oil in Texas! However, the terrain is tricky and the upfront cost (immediate cost) of extracting with current technology is $38 million. Youve also heard of a new extraction technology being developed at UGA. There is an 80% chance that this technology will be successful and ready-to-use in exactly one year. If its not ready in one year (20% chance), then it will never be ready. The new technology is expected to reduce the extraction cost to $16 million. If you decide to wait, you will have to pay $5 million to the landowner as a fee to prevent other oil companies from trying to drill on the land. This payment would be due at the end of the year. You also know the following:

• You can extract 100,000 barrels every year forever once you pay the upfront extraction cost
• The price of a barrel of oil is expected to be $50 at the end of this year and is expected to fall by 4% every year forever. All revenues are realized at the end of the year.
• There are no extraction costs other than the upfront cost
• Your opportunity cost of capital is 10%Q

What is the NPV of the project if you decide to drill today?

What is the NPV of the project if you decide to wait one year?