Suppose that an oil well is expected to produce 1,200,000 barrels of oil during its first year in production. However, its subsequent production (yield) is expected to increase by 9% over the previous year's production. The oil well has a proven reserve of 10,500,000 barrels. (a) Suppose that the price of oil is expected to be $120 per barrel for the next six years. What would be the present worth of the anticipated revenue stream at an interest rate of 10% compounded annually over the next six years? (b) Suppose that the price of oil is expected to start at $120 per barrel during the first year, but to increase at the rate of 3% over the previous year's price. What would be the present worth of the anticipated revenue stream at an interest rate of 10% compounded annually over the next six years? (c) Consider part (b) again. After three years' production, you decide to sell the oil well. What would be a fair price?
Suppose that an oil well is expected to produce 1,200,000 barrels of oil during its first
year in production. However, its subsequent production (yield) is expected to increase
by 9% over the previous year's production. The oil well has a proven reserve of
10,500,000 barrels.
(a)
Suppose that the
What would be the present worth of the anticipated revenue stream at an interest rate
of 10% compounded annually over the next six years?
(b)
Suppose that the price of oil is expected to start at $120 per barrel during the first
year, but to increase at the rate of 3% over the previous year's price. What would be
the present worth of the anticipated revenue stream at an interest rate of 10%
compounded annually over the next six years?
(c)
Consider part (b) again. After three years' production, you decide to sell the oil well.
What would be a fair price?
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