It has been a while since oil extraction took place in Sweden, a company Rute Petroleum is now planning to initiate production on a small scale. The company is expecting today’s oil price at 65 dollars per oil barrel to increase in the future.

Used oil rigs will be brought in from Texas to be used in the south of Sweden. The investment is taking place in the beginning of 2017 and the first extraction will also take place in 2017. Rute estimates the price of oil for 2017 to be 70 dollars per barrel of crude oil. From that point on, they estimate the price to increase with 5 dollars per barrel and per year, until the price reaches $95. When it reaches that level, it will stay constant. All values are expressed in current monetary values and the exchange rate stays constant at SEK 8 per dollar.

The investment sum is SEK 100 million and half of this (the equipment) is depreciated linearly over 10 years and the other half (the drilling holes) over 15 years. Faster depreciation pace is not desirable due to limitations of profitability. The first depreciations occur during 2017. The fixed costs are estimated to be SEK 10 million each year and the variable costs
are estimated to be SEK 240 per barrel. These costs are assumed to be unchanged, in terms of real values, in the future. Operations are assumed to be up and running for 15 years and will not have a residual value. The nominal required return after tax is 10 %, the inflation rate is estimated to be 2% and the tax rate is 22%.

Calculate how many barrels that have to be extracted per year in order to reach break-even. Assume that both costs and revenues lead to payments in the same year as the costs and revenues occur.

Answer rating: 100% (QA)

YES Break Even Analysis in economics business and cost accounting refers to the point in which total ... View the full answer