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The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the 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.
While the company is fairly confident about its cash flow forecast, it recognizes that if it waits 2 years, it would have more information about the local geology as well as the price of oil. Karns estimates that if it waits 2 years, the project would cost $9 million. Moreover, if it waits 2 years, there is a 90 percent chance that the net cash flows would be $4.2 million a year for 4 years, and there is a 10 percent chance that the cash flows will be $2.2 million a year for 4 years. Assume that all cash flows are discounted at 10 percent.
a. If the company chooses to drill today, what is the project's net present value?
b. Using decision tree analysis, would it make sense to wait 2 years before deciding whether to drill?
According to the Miller and Modigliani model dividened policy is irrelevant. However, there are numerous factors in the real world that violate the MM assumptions.
Draw a diagram showing the profits for each position for each price of gold. (c) Which option has the lowest risk? Explain
nbspbased on the value driver assumptions provided create pro-forma income statement cells rows 25 -nbsp39 and balance
marshall has calculated that he will need $1,250,000 in his retirment fund in 40 years when he plans to retire. If marshall can earn 8% annually over this period how much does marshall need to save annually to meet the goal?
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The $3,000 space charge in Matthew's budget is his share (allocated based on relative square feet) of the company's total cost of rent, utilities, and janitorial costs for the administrative office building
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condensed balance sheet and income statement data for sievert corporation are presented here and on the next page.
waterco is a manufacturer of boat parts and has been in business only a few years. its board of directors decided to
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Describe how the definitions of assets and liabilities have evolved over the years.
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