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.
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 11P
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Question
![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 ahead to drill the well.
go](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F828ce15e-5110-4547-95d6-c4d8b77d9cae%2Ffe9b7f26-3b8b-43ee-958f-d9f657268980%2F8ng5o6j_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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 ahead to drill the well.
go
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