Your firms geologists have discovered a small oil field in New Yorks Westchester County. The field is

Question:

Your firm’s geologists have discovered a small oil field in New York’s 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:

a. The cash flows are forecasted to continue forever, with no expected growth or decline.

b. The cash flows are forecasted to continue for 20 years only, with no expected growth or decline during that period.

c. The cash flows are forecasted to continue forever, increasing by 3% per year because of inflation.

d. The cash flows are forecasted to continue for 20 years only, increasing by 3% per year because of inflation.

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...