ing op panty 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 its 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, if 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 % . Use the Black - Scholes model to estimate the value of the option. Assume the variance of the project's rate of return is 0.632 and that the risk - free rate is 6%. Do not round intermediate calculations. Enter your answer in millions. For example, an answer of S1.234 million should be entered as 1.234, not 1, 234, 000. Round your answer to three decimal places. S million
ing op panty 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 its 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, if 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 % . Use the Black - Scholes model to estimate the value of the option. Assume the variance of the project's rate of return is 0.632 and that the risk - free rate is 6%. Do not round intermediate calculations. Enter your answer in millions. For example, an answer of S1.234 million should be entered as 1.234, not 1, 234, 000. Round your answer to three decimal places. S million
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 9P
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