Lisa Oil has a present investment of $40m, which is expected to give, rise to annual contribution
Question:
Lisa Oil has a present investment of $40m, which is expected to give, rise to annual contribution of $25m for 4 years. This is based on crude sales, with a sales volume of 10m pbd. Assuming due to severe turbulence on the global market, the selling price of crude has fallen to a record low of $12.50 per barrel and variable cost per barrel is $10. Lisa Oil incurs an annual fixed cost of 10m for the next four years; and the firm's discount rate is 10%.
a. Calculate the NPV of this investment and make an investment decision.
b. Calculate the sensitivity of your calculation to the following:
i. sales volume
ii. Fixed Cost
iii. Discount rate
c. What could be the possible underlining factors that could lead to such severe turbulence on the global market causing oil prices to fall to a record low of $12.50 per barrel, illustrating this with the most recent historical record low prices.
Accounting for Decision Making and Control
ISBN: 978-0078025747
8th edition
Authors: Jerold Zimmerman