Suppose that an oil well is expected to produce 100,000 barrels of oil during its first year
Question:
(a) Suppose that the price of oil is expected to be $60 per barrel for the next several years. What would be the present worth of the anticipated revenue stream at an interest rate of 12% compounded annually over the next seven years?
(b) Suppose that the price of oil is expected to start at $60 per barrel during the first year, but to increase at the rate of 5% over the previous year's price. What would be the present worth of the anticipated revenue stream at an interest rate of 12% compounded annually over the next seven years?
(c) Consider part (b) again. After three years' production, you decide to sell the oil well. What
would be a fair price?
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a P 6000000P A110127 21372076 b Note that the oil price i...View the full answer
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