Question
RD Resources is now considering the drilling of a new oil well. The well will cost $3,000,000 to drill and complete. The well is estimated
RD Resources is now considering the drilling of a new oil well. The well will cost $3,000,000 to drill and complete. The well is estimated to produce 25,000 barrels of oil per year with a useful life of 5 years. Operating costs of the new well will be $7 per barrel. A new supervisor will be hired at an annual salary of $180,000 to oversee the drilling and operation of the new well. The selling price of a barrel of oil is $60
. REQUIRED: (cca = 25%; tax rate = 30%; required rate of return: 10%)
1.Compute the annual after-tax cash flow from the new oil well (Calculate CCA for each year when calculating your annual after-tax cash flow) .
2. Using your answer from #1 above, calculate the payback (payout) period.
3.Calculate the net present value of the oil well
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started