Business, 08.11.2019 19:31 NutMeg6544

An oil company is drilling a series of new wells on the perimeter of a producing oil field. about 20 % of the new wells will be dry holes. even if a new well strikes oil, there is still uncertainty about the amount of oil produced: 40 % of new wells which strike oil produce only 1,000 barrels a day; 60 % produce 5,000 barrels a day. (a) forecast the annual cash revenues from a new perimeter well. use a future oil price of $100 per barrel. (b) a geologist proposes to discount the cash flows of the new wells at 30 % to offset the risk of dry holes. the oil company’s normal cost of capital is 10 %. does this proposal make sense? explain briefly why or why not.

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An oil company is drilling a series of new wells on the perimeter of a producing oil field. about 20...

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