Question
Homework help! please Luck Inc. owns a lease to extract crude oil from sea for 10 years starting immediately. It is considering the construction of
Homework help! please
Luck Inc. owns a lease to extract crude oil from sea for 10 years starting immediately. It is considering the construction of a deep-sea oil rig at a cost of $47 million which is expected to remain constant. The extraction costs are $35/bbl. The quantity of oil Q = 300,000 bbl per year forever. The cost of capital is 6% per year (disregard taxes).
Next year when the rig is constructed the price is expected to be either $60/bbl or $40/bbl (and is expected to remain constant) with 70% and 30% probability, respectively. The firm can open the rig in one year when it knows price for sure. If the firm chooses to wait, it will have to cover fixed costs, $1 million, during the idle year.
-Calculate NPV of the project if Luckoil opens the rig immediately.
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