An oil company is drilling a series of new wells on the perimeter of a producing oil field. About 40% of the new wells will be dry. Even if a new well strikes oil, there is still uncertainty about the amount of oil produced: 30% of new wells which strike oil produce only 3,000 barrels a week; 70% produce 40,000 barrels a week. <\/p>
<\/p>
(a) Forecast the annual revenues from a new perimeter well. Use a future oil price of $100 per barrel. <\/p>
(b) A geologist proposes to discount the cash flows of the new wells at 10% to offset the risk of drilling but not finding oil. The oil company's normal cost of capital is 5%. Does this proposal make sense? Explain briefly why or why not<\/p>", "transcribed_text": "", "related_book": { "title": "Essentials Of Forensic Accounting", "isbn": "1948306441, 978-1948306447", "edition": "2nd Edition", "authors": "Michael A Crain, William S Hopwood", "cover_image": "https:\/\/dsd5zvtm8ll6.cloudfront.net\/si.question.images\/book_images\/2021\/11\/6180cb73a5085_6436180cb7324789.jpg", "uri": "\/textbooks\/essentials-of-forensic-accounting-2nd-edition-9-78e-12", "see_more_uri": "" }, "free_related_book": { "isbn": "B09T32FPJK", "uri": "\/textbooks\/number-tracing-1-10-for-kindergarten-preschoolers-and-kindergarteners-ages-3-5-can-use-this-workbook-to-practice-the-numbers-0-to-10-1st-edition-979-8418291363-351071", "name": "Number Tracing 1 10 For Kindergarten Preschoolers And Kindergarteners Ages 3 5 Can Use This Workbook To Practice The Numbers 0 To 10", "edition": "1st Edition" }, "question_posted": "2024-06-06 14:08:07", "see_more_questions_link": "\/study-help\/questions\/business-business-communication-2023-February-20", "step_by_step_answer": "The Answer is in the image, click to view ...", "students_also_viewed": [ { "url": "\/how-can-one-determine-whether-a-specific-notforprofit-organization-should", "description": "How can one determine whether a specific not-for-profit organization should follow GASB guidance? 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