Fundamentals of Financial Manageme...
Fundamentals of Financial Manageme...
INVESTMENT TIMING OPTION The Engler Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $9 million today. Engler estimates that once drilled, the oil will generate positive cash flows of $43 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, it recognizes that if it waits 2 years, it will have more information about the local geology as well as the price of oil. Engler estimates that if it waits 2 years, the project will cost $12 million, and cash flows will continue for 4 years after the initial investment is made. Moreover, if it waits 2 years, there is a 95% chance that the cash flows will be $4.4 million a year for 4 years, and there is a 5% chance that the cash flows will be $2.4 million a year for 4 years. Assume that all cash flows are discounted at 11%.
- a. If the company chooses to drill today, what is the project’s expected net present value?
- b. Would it make sense to wait 2 years before deciding whether to drill? Explain.
- c. C. What is the value of the investment timing option?
- d. What disadvantages might arise from delaying a project such as this drilling project?
a.
To determine: The expected net present value (NPV) of the project.
Introduction:
NPV is the variation between the present value of the cash outflows and the present value of the cash inflows. In capital budgeting, the NPV is utilized to analyze the profitability of a project or investment.
Given information:
E Company has decided to drill for oil on a land of the company. This project estimated a cost of $9,000,000 and would make positive cash flows of $4,300,000 at the end of each next 4 years. The company has even estimated that when their wait for 2 years more, then the project would cost $12,000,000 and cash flows will continue for 4 years.
There is 95 percent probability that the cash flows will be $4,400,000 for 4 years when the company waits for two years and 5 percent probability that the cash flows will be $2,400,000 for 4 years. The entire cash flows are discounted at 11 percent...
b.
To determine: Whether it makes sense to wait for 2 years before drilling.
c.
To determine: The value of the investment timing option.
d.
To discuss: The disadvantage on delaying a project.
Chapter 13 Solutions
Additional Business Solutions
Find more solutions based on key concepts
Show solutions addPRICE/EARNINGS RATIO A company has an EPS of 2.40, a book value per share of 21.84, and a market/book ratio of ...
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
FUTURE VALUE OF AN ANNUITY Kind the future values of the following ordinary annuities: a. FV of 400 paid each 6...
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
What are the four methods of conducting E-business?
Accounting Information Systems
(Economic Systems) The United States is best described as having a mixed economy. What are some elements of com...
ECON: MICRO4 (New, Engaging Titles from 4LTR Press)
Kayla can cook dinner in 30 minutes and wash the laundry in 20 minutes. Her roommate takes half as long to do e...
Principles of Economics (MindTap Course List)
Discuss each of the following statements from the standpoints of equality and efficiency. a. Everyone in societ...
Brief Principles of Macroeconomics (MindTap Course List)
The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use a production possib...
Principles of Microeconomics (MindTap Course List)
Why do many communication consultants encourage businesspeople to move beyond bullet points? What do they recom...
Essentials of Business Communication (MindTap Course List)
A study of the relationship between age and various visual functions (such as acuity and depth perception) repo...
Probability and Statistics for Engineering and the Sciences
An economic model is a. a mechanical machine that replicates the functioning of the economy. b. a fully detaile...
Principles of Macroeconomics (MindTap Course List)
Effect of sales discounts Sod Nomro operates Watercraft Supply Company, an online boat parts distributorship th...
Corporate Financial Accounting
How is interest computed on an interest-bearing short-term note?
Cornerstones of Financial Accounting
The credit period during which the buyer of merchandise is allowed to pay usually begins with what date?
Financial & Managerial Accounting
A sample of midterm grades for five students showed the following results: 72, 65, 82, 90, 76. Which of the fol...
STATISTICS F/BUSINESS+ECONOMICS-TEXT
Describe the major steps in the managerial decision-making process.
Foundations of Business (MindTap Course List)
On April 30, the end of the first month of operations, Joplin Company prepared the following income statement, ...
Financial And Managerial Accounting
A 1996 bill reforming the federal government's anti-poverty programs limited many welfare recipients to only tw...
Essentials of Economics (MindTap Course List)
AH Biotech81 Dr. Abraham Hassan knew that be couldnt put off the decision any longer. AH Biotech die Bound Broo...
Management, Loose-Leaf Version
On January 1, 2019, Sharon Matthews established Tri-City Realty, which completed the following transactions dur...
Financial Accounting
Explain the five steps required when posting the journal to the ledger.
College Accounting, Chapters 1-27
Explain how relation-ship marketing can move customers up the loyalty ladder.
Contemporary Marketing
Discuss alternative strategies for selecting target markets
MKTG 12:STUDENT ED.-TEXT
List the steps in the closing procedure in the correct order.
College Accounting (Book Only): A Career Approach
The materials price variance is usually computed a. when goods are finished. b. when materials are issued to pr...
Managerial Accounting: The Cornerstone of Business Decision-Making
Cash dividends declared out of current earnings were distributed to an investor. How will the investors investm...
Intermediate Accounting: Reporting And Analysis
SYSTEM FLOWCHART AND PROGRAM FLOWCHART From the diagram in Problem 8, identify three types of errors that may c...
Accounting Information Systems
One often finds that a companys bonds have a higher yield than its preferred stock, even though an investor con...
Fundamentals of Financial Management (MindTap Course List)
Suppose the population of Area Y is relatively young, and the population of Area O is relatively old, but every...
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
Depreciation by three methods; partial years Layton Company purchased tool sharpening equipment on October 1, 2...
Financial & Managerial Accounting
Why are repeated games more likely than one-shot games to be cooperative?
Exploring Economics
The Commerce Department reported receiving the following applications for the Malcolm Baldrige National Quality...
Statistics for Business & Economics, Revised (MindTap Course List)
Cedar Springs Company completed the following selected transactions during June 2016: Instructions Journalize t...
Financial Accounting
Although you printed the trial balance and financial statements to get an idea of how All About You Spa is doin...
College Accounting (Book Only): A Career Approach
Ethics in Action Dash Riprock is a cost analyst with Safe Insurance Company. Safe is applying standards to its ...
Accounting (Text Only)
Describe how radio-frequency identification (RFID) works.
Pkg Acc Infor Systems MS VISIO CD
LO3 Which of these assets is not a current asset? (a) Cash (b) Accounts Receivable (c) Office Equipment (d) Mer...
College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)
The demand curve for cookies is downward-sloping. When the price of cookies is 2, the quantity demanded is 100....
Principles of Macroeconomics (MindTap Course List)
Managing Supplier Quality: Integrated Devices Bill Edwards is a quality engineer assigned to the Injected Moldi...
Purchasing and Supply Chain Management
In Example 11.3, we commented on the 95th percentile on days required and the corresponding date to start produ...
Practical Management Science
a. Harriet Pandel, an employer, is subject to FICA taxes but exempt from FUTA and SUTA taxes. During the last q...
PAYROLL ACCT.,2019 ED.(LL)-TEXT
ANALYZE THE ISSUE Return to Exhibit 8, and assume the equilibrium exchange rate is 150 yen per dollar and the e...
Economics For Today
Consider special-interest legislation that will transfer 40 million from group A to group B, a group with 10,00...
Economics (MindTap Course List)
Kildeer Company makes easels for artists. During the last calendar year, a total of 30,000 easels were made, an...
Cornerstones of Cost Management (Cornerstones Series)
Give a numerical example that illustrates how a tax placed on the purchase of good X can change the relative pr...
Macroeconomics
Adjusting entries On May 31, the following data were accumulated to assist the accountant in preparing the adju...
Corporate Financial Accounting
Indicate whether the following error would cause the accounting equation to the out of balance and, if so, indi...
Survey of Accounting (Accounting I)
