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What is the net present value of not testing

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    Assignment ID: FG133135161

    Question – There is a 15% chance that the amount of oil in a prospective field is 6 million barrels and a 85% chance of 15 million barrels. If the actual amount of oil is 6 million barrels, the present value of the cash flows from drilling will be $1 million. If the amount is 15 million barrels, the present value will be $8.5 million. The cost to drill the well is $4.5 million. Suppose, a test that costs $425,000 can verify the amount of oil under the ground, is it worth paying for the test?

    What is the net present value of not testing?

    What is the net present value of testing?

    Should the company perform the test to verify the amount of oil under the ground?

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