Homework help! please Luck Inc. owns a lease to extract crude oil from sea for...
80.2K
Verified Solution
Link Copied!
Question
Finance
Homework help! please
Luck Inc. owns a lease to extract crude oil from sea for 10 years starting immediately. It is considering the construction of a deep-sea oil rig at a cost of $47 million which is expected to remain constant. The extraction costs are $35/bbl. The quantity of oil Q = 300,000 bbl per year forever. The cost of capital is 6% per year (disregard taxes).
Next year when the rig is constructed the price is expected to be either $60/bbl or $40/bbl (and is expected to remain constant) with 70% and 30% probability, respectively. The firm can open the rig in one year when it knows price for sure. If the firm chooses to wait, it will have to cover fixed costs, $1 million, during the idle year.
-Calculate NPV of the project if Luckoil opens the rig immediately.
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
