You are an investment analysis expert working for an investment company and you are offered an oil
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Question:
- You are an investment analysis expert working for an investment company and you are offered an oil field investment opportunity. If risk free rate is 3%, using certainty equivalent method, should your company invest in it or not? Explain why or why not. (Refer to table 1 below)
Table 1
Initial Investment | $50 Million to be depreciated over 5 years using straight line method with zero salvage value |
Investment Period | 5 years |
Total Oil Capacity | 100 Million barrels, extracting 20 Million barrels each year |
Cost of Extraction per barrel | $25 |
Forward Price of oil in next 5 years | $30 with constant 5% increase each year |
Tax rate | 30% |
- Explain why forward rates are considered reliable estimates to be used in investment analysis.
Related Book For
Financial Statement Analysis
ISBN: 978-0078110962
11th edition
Authors: K. R. Subramanyam, John Wild
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