Corporate Finance Quiz
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CAPITAL BUDGETING
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An oil company discovers a new field that would require a $200 million investment to develop. Current oil prices make the project marginally unprofitable with an NPV of -$10 million. The company can delay development for up to three years while maintaining its drilling rights. Industry analysis suggests a 35% probability that oil prices will increase by 40% within two years due to geopolitical tensions. If the company delays one year, it forgoes $8 million in potential first-year cash flows but gains more information about price trends. What factor most significantly affects the value of the timing option in this scenario?
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