An oil and gas company wants to decide whether to initiate a new project. The success of the project depends heavily on the state of the economy, which has a 50/50 chance of being strong enough to support the venture. The project will require an initial investment of $1 Billion dollars, and the company expects to earn $500 Millions in annual revenues from the project—unless the economy goes into recession, in which case the project will return only $100 Millions per year. The company requires a 17% return on its investments. Should it undertake the project? If the company decides to wait a year, the economy has a 75% chance of improving sufficiently to ensure $500 Millions in annual returns. Does it make sense to wait for a year before making the investment? Use the options model approach to project evaluation to answer these two questions.

An oil and gas company wants to decide whether to initiate a new project. The success of the project depends heavily on the state of the economy, which has a 50/50 chance of being strong enough to support the venture. The project will require an initial investment of $1 Billion dollars, and the company expects to earn $500 Millions in annual revenues from the project—unless the economy goes into recession, in which case the project will return only $100 Millions per year. The company requires a 17% return on its investments. Should it undertake the project? If the company decides to wait a year, the economy has a 75% chance of improving sufficiently to ensure $500 Millions in annual returns. Does it make sense to wait for a year before making the investment? Use the options model approach to project evaluation to answer these two questions.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 5P

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