Assume the following investment on buying and drilling an oil lease:
The lease costs 300,000 dollars at time zero and drilling will start at year 1 with the cost of 250,000 dollars. There is 60% that well is a dry' hole without any production and abandonment cost of 150,000 dollars will be incurred at year 2. If drilling is successful and well is a producer, then there are two possibilities: 30% probability that well yields annual income of 220,000 dollars for 20 years (from year 2 to year 21) or 70% probability that well yields annual income of 180,000 dollars for 15 years (from year 2 to year 16).
Calculate Expected NPV for minimum ROR 8% and conclude if this investment economically satisfactory.