Solved

(Problems 12 and 13 Must Be Kept Together

question 8

Multiple Choice

(Problems 12 and 13 must be kept together. Use 13 only if 12 is also used.)
-Texas Wildcatters Inc. (TWI) is in the business of finding and developing oil properties, and then selling the successful ones to major oil refining companies. TWI 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, TWI 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.
Since the project is considered to be quite risky, a 20% cost of capital is used. What is the project's expected NPV, in thousands of dollars?

Definitions:

Unfreezing

Involves the process of making an organization or individual ready for change, by breaking down existing norms and behaviors.

Refreezing

The phase in the change process where new behaviors, values, and attitudes are solidified as the new status quo.

Force Field Analysis

A management technique developed by Kurt Lewin, used to identify all the forces for and against a decision or a change, helping to visualize and analyze the situation for better decision-making.

Refreezing

Involves reinforcing, stabilizing, and solidifying the new state after a change has been made, as part of Lewin's three-stage model of change.