Al Balushi Oil

Mohhamad Al Balushy the owner of Al Balushi Oil, is evaluating new oil production wells in Eastern part of Oman. Sara Al Farsi, the companys geologist, has just finished her analysis of the wells site. She has estimated that the well One would be productive for eight years, Two nine years, Three ten years. After which the oil will be fully produced. Sara has taken an estimate of the gold deposit to Zainab Al Amri, the companys financial officer. Sara asked Zainab to conduct an analysis of the new wells (One, Two and Three) and provide her recommendation on whether the company should open a new well and which project is better than others.

Zainab has used the estimates provided by Sara to determine the revenues that could be expected from the wells. She has also projected the expenses of opening the wells and the annual operating expenses. If the company opens well, it will have certain large expenses for the purchase and installation of equipment, and at the end of the project the company will incur some expenses associated with the liquidation of the wells. The expected cash flows each year from the well for project Well One, Well Two and Well Three are shown in the tables.

Q1:Based on your analysis, explain what advantages and disadvantages of each method of evaluating investment projects has.

Q2: If the company finds financial resources for the development of two wells, which two projects would you recommend. Provided that the required rate of return is reduced by 2%.

r 0.14 2 r 0.14 r 0.141 3 CF Year CF Year 01-530000 1 72000 2 96000 3 Question 2 3 1 4 Year CF 5 ol -500000 6 1 60000 7 2 95000 8 3 165000 9 4 210000 10 5 195000 11 6 140000 12 7 110000 13 8 80000 14 9 -85000 15 16 17 4 5 160000 225000 235000 140000 110000 850001 45000 01-785000 1 90000 2 120000 3 3 170000 4 230000 5 225000 6 210000 7 115000 8 105000 9 60000 10 80000 11 - 70000 6 7 8 9 10 -80000 10