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The Karns Company is deciding whether to drill for oil on a tract of land the company owns. The company estimates 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. Although the company is fairly confident about the cash flow forecast, in 2 years it will have more information about the local geology and about the price of oil. Karns estimates that if it waits 2 years then the project would cost $9 million. Moreover, it it waits 2 years, then there is a 90% chance that the net cash flows would be $4.2 million a year for 4 years and a 10% chance that they would be $2.2 million a year for 4 years. Assume all cash flows are discounted at 10%.
a. If the company chooses to drill today, what is the proje

Sagot :

A payment (in a currency), notably from one central bank account to another, is referred to as a cash flow in its strictest sense; the word "cash flow" is typically used to represent payments

that are anticipated to occur in the future, are therefore unknown, and require cash flow forecasting; A cash flow's time t, nominal quantity N, currency CCY, and account A are what make it up; symbolically, CF = CF (t,N,CCY,A). However, it is common to use the term "cash flow" in a broader meaning to describe (symbolic) payments into or out of a company, project, or financial product.Value, interest rate, and liquidity are only loosely correlated with cash flows.

learn more about cash flow here:

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