In: Finance
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Drilling Experts, Inc.
Drilling Experts, Inc. (DEI) finds and develops oil properties and
then sells the successful ones to major oil refining companies. DEI
is now considering a new potential field, and its geologists have
developed the following data, in thousands of dollars.
t = 0. | A $400 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. |
t = 1. | If the feasibility study indicates good potential, the firm would spend $1,000 at t = 1 to drill exploratory wells. The best estimate is that there is an 80% probability that the exploratory wells would indicate good potential and thus that further work would be done, and a 20% probability that the outlook would look bad and the project would be abandoned. |
t = 2. | If the exploratory wells test positive, DEI would go ahead and spend $10,000 to obtain an accurate estimate of the amount of oil in the field at t = 2. The best estimate now is that there is a 60% probability that the results would be very good and a 40% probability that results would be poor and the field would be abandoned. |
t = 3. | If the full drilling program is carried out, there is a 50% probability of finding a lot of oil and receiving a $25,000 cash inflow at t = 3, and a 50% probability of finding less oil and then only receiving a $10,000 inflow. |
Refer to the data for Drilling Experts. Calculate the project's coefficient of variation. (Hint: Use the expected NPV.)
The expected NPV is $461.11 and WACC was 20%