An offshore oil Company has discovered new oil reserves of 70 million barrels where the cost of developing these reserves is approximately $430 million. The company has the right to exploit these reserves for the next 20 years. The development lag is 3 years. The current price and production costs are $60/barrel and $30/barrel, respectively. The cost of delay is 4% p.a, the risk-free rate is 10% p.a; the variance in oil prices is 0.04. 

What is the current value of the underlying reserves net of the production cost if extracted today?

Answer rating: 100% (QA)

ANSWER To calculate the current value of the underlying reserves net of the production cost if extra... View the full answer