You own a plant producing oil. On 2017 the plant produced a quantity of 2,500 barrels of oil. The market price of a barrel of oil at 1.1.2018 is $50. Assume the plant's oil production is perpetual (lasts forever), all cash flows are received at the end of the year and the annual interest rate is 8%. Calculate the plant's economic value at 1.1.2018 under the following scenarios. (The plant's value is equal to the present value of all the future cash flows it is expected to generate) Oil production and the price of oil will remain constant at their present levels. $125,000/.08= $1,562,500 Oil production is constant, the price of oil increases at a rate of 3% per year. $125,000/(.08-.03)= $2,500,000 Oil production increases at a rate of 9% each year, the price of oil remains constant. r>g, cannot solve the question.
You own a plant producing oil. On 2017 the plant produced a quantity of 2,500 barrels of oil. The market price of a barrel of oil at 1.1.2018 is $50. Assume the plant's oil production is perpetual (lasts forever), all cash flows are received at the end of the year and the annual interest rate is 8%. Calculate the plant's economic value at 1.1.2018 under the following scenarios. (The plant's value is equal to the present value of all the future cash flows it is expected to generate) Oil production and the price of oil will remain constant at their present levels. $125,000/.08= $1,562,500 Oil production is constant, the price of oil increases at a rate of 3% per year. $125,000/(.08-.03)= $2,500,000 Oil production increases at a rate of 9% each year, the price of oil remains constant. r>g, cannot solve the question.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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- You own a plant producing oil. On 2017 the plant produced a quantity of 2,500 barrels of oil. The market price of a barrel of oil at 1.1.2018 is $50. Assume the plant's oil production is perpetual (lasts forever), all cash flows are received at the end of the year and the annual interest rate is 8%.
Calculate the plant's economic value at 1.1.2018 under the following scenarios. (The plant's value is equal to the
- Oil production and the price of oil will remain constant at their present levels.
$125,000/.08= $1,562,500
- Oil production is constant, the price of oil increases at a rate of 3% per year.
$125,000/(.08-.03)= $2,500,000
- Oil production increases at a rate of 9% each year, the price of oil remains constant.
r>g, cannot solve the question.
Expert Solution
Step 1
Economic value means value of firm created in excess of RRR. Simply it is the benefit arises from good and services.
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