A company has an oil well that is expected to produce 3000 barrels of oil next year with production declining by 20% annually thereafter. Under an expected constant oil price of $45/barrel and constant operating costs of $65,000 per year in the future, production would be economically viable for four years (including next year). It is considering drilling an additional well for a waterflood project or, alternatively, drilling four infill wells

The waterflood project would involve $100,000 in capital costs this year. It would boost next years production to 5000 barrels, reduce the decline rate to 15% and extend the economic life of the well to six years. Operating costs associated with running the waterflood project would be $30,000 per year.

The infill project would increase next years production to 9000 barrels but increase the decline rate to 40% and reduce the economic life to three years. Incremental operating costs associated with each infill well would be $10,000 per year.

Given a marginal opportunity cost of investment of 12%, use NPV analysis to assess the best course of action for the company. Assume new wells cost $100,000 to drill and complete and that abandonment and reclamation expenses are $20,000 per well.

should they choose infill wells or waterflood?