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Geometric Gradient Problem: The Saudis produce 3.65 Billion barrels of oil a year. Let’s ignore climate...

Geometric Gradient Problem:

The Saudis produce 3.65 Billion barrels of oil a year. Let’s ignore climate change and drone stuff and say that production will increase at 2% per year due to demand from Asia. Also, the current price of $65/barrel is expected to increase by 4 percent a year for 20 years. What is the present worth of the anticipated 20 years revenue stream assuming the interest rate is 8%.

Solutions

Expert Solution

Present value =

$3,951.48 billion

WORKINGS

Year Production (billion) Price per barrel Revenue($ billion)
1 3.723 67.6 251.6748
2 3.79746 70.304 266.9766278
3 3.8734092 73.11616 283.2088068
4 3.950877384 76.0408064 300.4279023
5 4.029894932 79.08243866 318.6939187
6 4.11049283 82.2457362 338.070509
7 4.192702687 85.53556565 358.6251959
8 4.276556741 88.95698828 380.4296078
9 4.362087875 92.51526781 403.559728
10 4.449329633 96.21587852 428.0961595
11 4.538316226 100.0645137 454.124406
12 4.62908255 104.0670942 481.7351698
13 4.721664201 108.229778 511.0246682
14 4.816097485 112.5589691 542.094968
15 4.912419435 117.0613279 575.054342
16 5.010667824 121.743781 610.017646
17 5.11088118 126.6135322 647.1067189
18 5.213098804 131.6780735 686.4508074
19 5.31736078 136.9451964 728.1870165
20 5.423707995 142.4230043 772.4607871

jeff jeffy answered 2 months ago
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