Question
Your firms geologists have discovered a small oil field in New Yorks Westchester County. The field is forecasted to produce a cash flow of C1
Your firms geologists have discovered a small oil field in New Yorks Westchester County. The field is forecasted to produce a cash flow of C1 $2 million in the first year. You estimate that you could earn an expected return of r 12% from investing in stocks with a similar degree of risk to your oil field. Therefore, 12% is the opportunity cost of capital. What is the present value? The answer, of course, depends on what happens to the cash flows after the first year. Calculate present value for the following cases:
Present value of cash flows if no growth rate = $ 14,938,887.2487 or 14.94 millions ; Present value of cash flows if 3% growth rate = $ 18,061,473.1317 or 18.06 millions
QUESTION : Evaluate the cashflows in a and b and explain which one you will choose and why
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