1. A natural gas upstream company acquires a license for an onshore block and estimates that drilling a well will cost US$250 million. If natural gas is found the net present value is forecasted at US$1 billion. From its analysis of the block, the company has determined that there is a 70% chance of drilling a dry hole in this block. a) Draw a decision tree to represent the NPV outcomes of the company. b) Calculate the expected value and state whether the company should go ahead to drill the well.

1. A natural gas upstream company acquires a license for an onshore block and estimates that drilling a well will cost US$250 million. If natural gas is found the net present value is forecasted at US$1 billion. From its analysis of the block, the company has determined that there is a 70% chance of drilling a dry hole in this block. a) Draw a decision tree to represent the NPV outcomes of the company. b) Calculate the expected value and state whether the company should go ahead to drill the well.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 11P

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