Question

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.