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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 receiving only 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?
Cash Payments
Outflows of cash from a company, covering expenses like salaries, suppliers, and other operational or investment activities.
Merchandising Company
A business that purchases finished products and sells those products to consumers.
Accounts Payable
Liabilities representing the amount a company owes to creditors for purchases made on credit.
Cash Inflow
Money entering a business, typically from operations, investments, or financing activities.
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