An oil company is drilling a series of new wells on the perimeter of a producing oil
Question:
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? Briefly explain why or why not.
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Related Book For
Principles of Corporate Finance
ISBN: 978-0078034763
11th edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen
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