The Karns Company is deciding whether to drill for oil on a tract of land the co

Question

The Karns Company is deciding whether to drill for oil on a tract of land the company owns. The company estimates the project would cost $8 million today.                    Karns estimates that, once drilled, the oil will generate positive net cash flows of $4 million a year at the end of each of the next 4 years. Although the                    company is fairly confident about the cash flow forecast, in 2 years it will have more information about the local geology and about the price of oil. Karns                    estimates that if it waits 2 years then the project would cost $9 million. Moreover, it it waits 2 years, then there is a 90% chance that the net cash flows                    would be $4.2 million a year for 4 years and a 10% chance that they would be $2.2 million a year for 4 years. Assume all cash flows are discounted at                    10%.
                    a. If the company chooses to drill today, what is the project

Explanation / Answer

a. If the company chooses to drill today, project

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