Pinkleys Prospect Case Solution

The project has seven alternatives available, whereby drilling would result in a dry hole, two oil-producing wells, four oil-producing wells, and seven oil-producing wells. Additionally, if oil is discovered, the price per barrel would either fall to $25 or remain at the $50 level. This makes the total number of scenarios seven. Each scenario has its own set of revenues and operating costs, which has been used to work out the net present value of the prospects. In the dry hole scenario, the net present value is negative, which is a complete loss and would result in the system being plugged and abandoned. If oil is discovered, but the price falls to $25, then the project would have a negative net present value irrespective of the number of oil-producing wells. If the price remains at the $50 level, then the net present value would be positive for the three scenarios and would be highest if the drilling resulted in seven oil-producing wells.