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Petroleum Inc owns a lease to extract crude oil from sea It is considering the construction of a deep sea oil rig at a cost of $50 million (I0) and is expected to remain constant The price of oil P is $40bbl and the extraction costs are $25bbl The quantity of oil Q 300,000 bbl per year forever The risk free rate is 6 per year and that is also the cost of capital (Ignore taxes). Suppose the oil price is uncertain and can be $60/bbl or $30/bbl next year with equal probability, then what will be the expected NPV of the project if postponed by one year ?

Respuesta :

ogorwyne

The expected NPV of the project if postponed by one year is 58.9m.

When oil price is = 60 bbl

[tex][\frac{(60-25)*300000}{0.06} ]-50000000\\\\=175000000-50000000\\\\= 125000000[/tex]

When oil price is 30bbl =

[tex][\frac{(30-25)*300000}{0.06}]-50000000\\\\25000000- 50000000\\\\= -25000000[/tex]

This is negative so we have to reject it and put it at 0

The Expected NPV

[tex]\frac{0.5(0)+0.5(125000000)}{1.06}[/tex]

= 58.9m

The expected NPV of the project if postponed by one year is 58.9m.

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