PART II: Investment Opportunity Midland is considering investing in a new oil field in West Africa (it already holds three fields there). The new field is expected to take five years to complete at a total cost of $1.2B. The first phase of the project would then last 15 years. The petroleum engineers guess the field will produce 4 million barrels per year for the first five years it operates, then 2 million the next five years, and 1 million for the final five years. After the field is developed, operating costs are expected to be $10M per year. Current oil prices are $75 per barrel.

1. Make a spreadsheet showing the cash flow each year for this project.

2. What discount rate will you use for this project and why?

3. Show the discount factor for each year and the present value cash flow on the spreadsheet.

4. At $75 per barrel is this a good investment and why?

5. The engineers ask whether your model accounts for the fact that oil prices might go down in the future, what do you tell them?

PART III: Acquisition Target Midland has ownership interest in 40 refineries around the world. However, it has a limited presence in the West African refining market. It is considering buying another energy company, Westland Holdings, LLC that owns five African refineries. Westland is valued at $70B (a decent approximation of the purchase price). You are told that Midland expects its refining assets to continue to be valuable for 20 years and in year 21 to sell them for $15B (future value).

6. What discount rate will you use for this analysis and why?

7. Assume yearly income is constant. What must income be for this investment to have an NPV=0?