Engineering Economics 4. The Shockers Company is considering making a bid to buy
ID: 2339351 • Letter: E
Question
Engineering Economics
4. The Shockers Company is considering making a bid to buy Pacific Gulf Petroleum (PGP) Company. PGP has several oil wells producing 200,000 barrels per month. It is expected that the oil production will increase 2% per month for the next 3 years. The price of oil is $50 per barrel for 3 years and is not expected to change. The operating expenses are S10 million per month and are expected to decrease by $100,000 each month. The company's MARR is 24% per year, compounded monthly. What is the maximum price Shockers Company should bid for PGP?Explanation / Answer
Let us first note down all that is given in the question.
Barrels of oils produced per month = 200,000
Increase in production = 2% / month or 24% annually
Annual increase in barrels = 24% of 200,000 = 48000 barrels
Revenue from Barrels = ((200,000*12) + 48000) $50 = $122.4 Millions
Operating Costs
Operating cost / month = $ 10 million
Decrease in cost/ month = $ 100,000
Annual operating cost = $ 55 million (till 10 months after which there will be no additional cost incurred)
Profits = 122.4 - 55 = $ 67.4 Million
Value of Firm = 67.4 (PVIFA 2%,12) *3
= 67.4 10.58 (rounded up) 3
= $ 2138.33 Million
The Shockers Company sould bid a maximum of $ 2138.33 Million for buying out Pacific Gulf Petroleum Company
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