Question

Exxon-Mobil is planning to sell a number of producing oil wells. The wells are expected to produce 100,000 barrels of oil per year for 8 more years at a selling price of S28 per barrel for the next 2 years, increasing by $1 per barrel through year 8. How much should an independent refiner be willing to pay for the wells now, if the interest rate is 12% per year?

Answer 1

Total price of barrels in first year = 100000x28=2800000

It is increasing by $1 per barrel per year up to year 8

We will consider 2800000 as an annual series and cash flow of 100000 as gradient series increasing by 100000 each year up to year 8.

Now,finding present value

P=[2800000(P/A,i%,n)+100000(P/G,i%,n)+2800000](P/F,i%,n)

=[2800000(P/A,12%,7)+100000(P/G,12%,7)+2800000](P/F,12%,1)

=[2800000(4.5638)+1000000(11.6443)+2800000](0.8929)

=[12778640+1164430+2800000](0.8929)

=14949887.20