Reply
Tue 16 Apr, 2013 12:41 am
The exploration department of a major oil company has to decide whether or not to drill a satellite exploration prospect. The probability of finding reserves estimated to have an NPV of $35.5 million is 0.35. The cost of a well is $11 million.
Given the assigned probabilities, determine the expected monetary
value of the ‘drill’ case and state whether the company should drill or
not.
Seems preatty easy, but i am not sure if i am getting it right.
My thoughts are: you are the probablility of drill and not drill. If you drill and find reserves Pi = 0,35, if you drill and not find reserves Pi=0,65, if you don't drill the Pi=1. Being the NPV 35.5 million, therefore we have:
EMV= sum (Probability*Value)
Drill and find reserves is 0.35*35.5
Drill and not find reserves is 0,65*35.5
Not drill is 1*0 = 0
ENM = 0.35*35.5 + 0,65*35.5 ?
Hum..Should it be negative for threats (negative risks)?
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Given the following data:
Total current finance debt = $360 million at 9.0% per year
Total non-current finance debt = $520 million at 6.4% per year
Effective tax rate = 40%
Calculate:
(a) the cost of each type of finance.
Is it as simple as calculate the after-tax rate, where we multiply the before-tax rate by one minus the marginal tax rate (before-tax rate x (1-marginal tax)). ?
Thanks.
Invest in gold and coconut oil
@mark noble,
Thanks for the answer Mark!!!! Your help was really necessary!
@hmachado,
YW!
Do you realise that had you followed my suggestion at the time I posted it, and had invested $10mill in each, you would now be $127k wealthier?
@mark noble,
Don't you have better things to do? I bet you do...
@hmachado,
You also have to include the cost of drilling.
ENM = .35*(35.5-11) + .65(-11)
ENM = 8.575 - 10.45
ENM = -1.875
On average, exploring sites like the one described will result in a $1.875 million loss for each site explored.
@DrewDad,
Hello,
Thanks for helping out, i understand now!