Suppose than an oil well is expected to produce 100,000 barrels of oil during it

Question

Suppose than 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 years production. The price of oil is expected to be $60/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? ( Please Show Detailed work)

$25,200,000

$21,372,076

$20,670,554

$19,554,870

a.

$25,200,000

b.

$21,372,076

c.

$20,670,554

d.

$19,554,870

Explanation / Answer

Option (b).

Note: Total revenue (TR) = Price (P) x Output (Q)

Year P Q TR PVIF(12%, 7) Discounted TR ($) ($) ($) (A) (B) (C)=(A)x(B) (D) (C) x (D) 1 60 1,00,000 60,00,000 0.892857143 53,57,143 2 60 90,000 54,00,000 0.797193878 43,04,847 3 60 81,000 48,60,000 0.711780248 34,59,252 4 60 72,900 43,74,000 0.635518078 27,79,756 5 60 65,610 39,36,600 0.567426856 22,33,733 6 60 59,049 35,42,940 0.506631121 17,94,964 7 60 53,144 31,88,646 0.452349215 14,42,382 PW ($) = 213,72,076

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