An oil company executive is considering investing $10 million in one or both of two wells: well 1 is expected to produce oil worth $3 million a year for 10 years; well 2 is expected to produce $2 million for 15 years. These are real (inflation adjusted) cash flows. The beta for producing wells is .9. The market risk premium is 8%, the nominal risk free interest rate is 6%, and expected inflation is 4%. The two wells are intended to develop a previously discovered oil field. Unfortunately there is still a 20% chance of a dry hole in each case. A dry hole means zero cash flows and a complete loss of the $10 million investment. Ignore taxes and make further assumptions as necessary.
a. What is the correct real discount rate for cash flows from developed wells?
b. The oil company executive proposes to add 20 percentage points to the real discount rate to offset the risk of a dry hole. Calculate the NPV of each well with this adjusted discount rate.
c. What do you say the NPVs of the two wells are?
d. Is there any single fudge factor that could be added to the discount rate for developed wells that would yield the correct NPV for both wells? Explain.
Why Choose Us
Top quality papers
We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.
Professional academic writers
We have hired a team of professional writers experienced in academic and business writing. Most of them are native speakers and PhD holders able to take care of any assignment you need help with.
Free revisions
If you feel that we missed something, send the order for a free revision. You will have 10 days to send the order for revision after you receive the final paper. You can either do it on your own after signing in to your personal account or by contacting our support.
On-time delivery
All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.
Original & confidential
We use several checkers to make sure that all papers you receive are plagiarism-free. Our editors carefully go through all in-text citations. We also promise full confidentiality in all our services.
24/7 Customer Support
Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.
Try it now!
How it works?
Follow these simple steps to get your paper done
Place your order
Fill in the order form and provide all details of your assignment.
Proceed with the payment
Choose the payment system that suits you most.
Receive the final file
Once your paper is ready, we will email it to you.
Our Services
No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.
Essays
You are welcome to choose your academic level and the type of your paper. Our academic experts will gladly help you with essays, case studies, research papers and other assignments.
Admissions
Admission help & business writing
You can be positive that we will be here 24/7 to help you get accepted to the Master’s program at the TOP-universities or help you get a well-paid position.
Reviews
Editing your paper
Our academic writers and editors will help you submit a well-structured and organized paper just on time. We will ensure that your final paper is of the highest quality and absolutely free of mistakes.
Reviews
Revising your paper
Our academic writers and editors will help you with unlimited number of revisions in case you need any customization of your academic papers