?Multiple Part: The following 2 problems must be kept together. The first problem can be used alone, but use the second problem ONLY if the first problem is also used. ? Exhibit 13.1 Texas Wildcatters Inc. (TWI) is in the business of finding and developing oil properties, then selling the successful ones to major oil companies. It is now considering a new potential field, and its geologists have developed the following data, shown in thousands of dollars. * t = 0 A $350 feasibility study would be conducted at t = 0. The results of this study would determine if the company should commence drilling operations or make no further investment and abandon the project. There is an 80% probability that the feasibility study would indicate that an exploratory well should be

Question

drilled.  There is a 20% probability that no further work would be done.  *     t = 1  If the feasibility study indicates good potential, the firm would spend $1,200 at t = 1 to drill an exploratory well. The best estimate is that there is a 60% probability that the exploratory well would indicate good potential and thus that further work would be done, and a 40% probability that the outlook would be poor and the project would be abandoned. *     t = 2  If the exploratory well tests positive, the firm would go ahead and spend $8,000 to obtain an accurate estimate of the amount of oil in the field at t = 2. *     t = 3  If the full drilling program is carried out, there is a 50% probability of finding a lot of oil and receiving $25,000 cash inflow at t = 3, and a 50% probability of finding less oil and then receiving only a $8,000 inflow. *     Since the project is considered to be quite risky, a 18.00% cost of capital is used. ? ? Refer to Exhibit 13.1. What is the project's expected NPV, in thousands of dollars? ?

A. 0$1,033.81
B. 0$719.18
C. 0$854.02
D. 0$898.97
E. 0$943.92

Answer 1

Answer: D