Petroleum Inc owns a lease to extract crude oil from sea It is considering the construction of a deep sea oil rig at a cost of $50 million (I0) and is expected to remain constant The price of oil P is $40bbl and the extraction costs are $25bbl The quantity of oil Q 300,000 bbl per year forever The risk free rate is 6 per year and that is also the cost of capital (Ignore taxes).

Suppose the oil price is uncertain and can be $60/bbl or $30/bbl next year with equal probability, then what will be the expected NPV of the project if postponed by one year ?

Answer rating: 100% (QA)

NPVoil price 60bbl 60 25300000006 50000000 1250000... View the full answer