Suppose that an oil is expected to produce 100,00 barrels of oil during its firs

Question

Suppose that an oil is expected to produce 100,00 barrels of oil during its first production year. However, its subsequent production (yield) is expected to increase by 12% over the previous year's production. The oil well has a proven reserve of 1,000,000 barrels.

Suppose that the price of oil is expected to be $30.00 per barrel during the next four years. What would be the future worth at the end of four years, of the anticipated revenue stream over the next four years? Assume an interst of 10% compounded annually.

Explanation / Answer

Answer:

Just calculate simple cash flow for production:

Years Output Revenue (TR=Q*P) P.V.F (10% Discounted cash flow 1 10000 300000 0.909 272700 2 11200 336000 0.8264 277670.4 3 12544 376320 0.7513 282729.216 4 14049.28 421478.4 0.683 287869.7472 Total 47793.28 1433798.4 1120969.363

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