Question
Petroleum Incorporated (PI) controls offshore oil leases. It is considering the construction of a deep-sea oil rig at a cost of $540 million. The price
Petroleum Incorporated (PI) controls offshore oil leases. It is considering the construction of a deep-sea oil rig at a cost of $540 million. The price of oil is $140 per bbl. and extraction costs are $90per bbl. PI expects costs to remain constant. The rig will produce an estimated 1,200,000 bbl. per year forever. The risk-free rate is 10 percent per year, which is also the cost of capital. (Ignore taxes). Suppose that oil prices are uncertain and are equally likely to be $160 per bbl. or $120 per bbl. next year. Calculate today's NPV of the project (i.e., NPV @ t = 0) if it were postponed by one year.
$267 million
$250 million
$140 million
$136 million
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