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You are an investment analysis expert working for an investment company and you are offered an oil field investment opportunity. If risk free rate is

You are an investment analysis expert working for an investment company and you are offered an oil field investment opportunity. If risk free rate is 5%, using certainty equivalent method, should your company invest in it or not? Explain why or why not. (Refer to Table 1 below, no decimals are needed)

Table 1

Initial Investment

$100 Million to be depreciated over 5 years using straight line method with zero salvage value

Investment Period

5 years

Total Oil Capacity

10 million barrels, extracting 20 million barrels each year

Cost of Extraction per barrel

$30

Forward Price of Oil in next 5 years

$40 per barrel with constant 2% increase each year

Tax rate

30%

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