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# Suppose that an oil well is expected to produce 100000 barrels of oil during its first year in production However its subsequent production

Suppose that an oil well is expected to produce 100,000 barrels of oil during its first year in production. However, its subsequent production (yield) is expected to decrease by 10% over the previous year’s production. The oil well has a proven reserve of 1,000,000 barrels.

(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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Apr 29 2020 View more View Less