Question

1. You are planning to invest in a productive oil well that is expected to produce 2,000 barrels of oil per year for 10 years. The current price of oil is $42 per barrel, but the price is expected to increase at a rate of 3 percent per year for the next 10 years. If your opportunity cost of funds is 8.25 percent p.a., what would be the upper limit of how much you would be willing to pay for this investment?

Answer 1

CURRENT PRICE PER BARREL $42
INCREASE IN PRICE PER YEAR 3%
YEARS		EXPECTED PRICE PER BARREL		TOTAL SALES		PV FACTOR	PV
		(CURRENT PRICE + 3%)		(PRICE*2000 BARRELS)
1		43.26		86520.00		0.92		79598.4
2		44.56		89115.60		0.85		75748.26
3		45.89		91789.07		0.79		72513.36
4		47.27		94542.74		0.73		69016.2
5		48.69		97379.02		0.67		65243.94
6		50.15		100300.39		0.62		62186.24
7		51.65		103309.40		0.57		58886.36
8		53.20		106408.69		0.53		56396.6
9		54.80		109600.95		0.49		53704.46
10		56.44		112888.98		0.45		50800.04
								644093.9
CONCLUSION:-	THE UPPER LIMIT FOR INVESTMENT WILL BE $644093.90
CURRENT PRICE PER BARREL $42
INCREASE IN PRICE PER YEAR 3%
YEARS		EXPECTED PRICE PER BARREL		TOTAL SALES		PV FACTOR	PV
		(CURRENT PRICE + 3%)		(PRICE*2000 BARRELS)
1		43.26		86520.00		0.92		79598.4
2		44.56		89115.60		0.85		75748.26
3		45.89		91789.07		0.79		72513.36
4		47.27		94542.74		0.73		69016.2
5		48.69		97379.02		0.67		65243.94
6		50.15		100300.39		0.62		62186.24
7		51.65		103309.40		0.57		58886.36
8		53.20		106408.69		0.53		56396.6
9		54.80		109600.95		0.49		53704.46
10		56.44		112888.98		0.45		50800.04
								644093.9
CONCLUSION:-	THE UPPER LIMIT FOR INVESTMENT WILL BE $644093.90			jeff jeffy Next > < Previous Related Solutions You are investigating the possibility of investing in a productive oil well that is expected to... You are investigating the possibility of investing in a productive oil well that is expected to produce 2,500 barrels of oil per year for 5 years. The current price of oil is $70 per barrel, but the price is expected to increase at a constant rate of 3 percent per year for the next 5 years. If your opportunity cost of funds is 13.50 percent p.a., what would be the upper limit of how much you would be willing to... Suppose that an oil well is expected to produce 12, 00,000 barrels of oil during its... Suppose that an oil well is expected to produce 12, 00,000 barrels of oil during its first production year However its subsequent production (yield) is expected to decrease by 9% over the previous year's production The oil well has a proven reserve of 10, 50 barrels. 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