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5. Your firms geologists have discovered a small oil field in New Yorks Westchester County. The field is forecasted to produce a cash flow of C1-$100,000 in the first year. You estimate that you could earn an expected return of r = 12% from investing in stocks with a similar degree of risk to your oil field. Therefore, 12% is the opportunity cost of capital. Suppose initial investment will cost you $900,000, which is the best case for you to undertake this project. (a) The cash flows are forecasted to continue for 20 years only, with no expected growth or decline during that period. (b) The cash flows are forecasted to continue forever, with no expected growth or decline. (c) The cash flows are forecasted to continue for 20 years only, increasing by 3% per year because of inflation (d) The cash flows are forecasted to continue forever, increasing by 3% per year because of inflation

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Answer #1

If revenue forecasted to continue forever with 12% and inflation of 3% is considered then

revenue = 100000 / (0.12-0.03) =1,111,111

And Investment is $900,000

Hence option D is correct

The cash flows are forecasted to continue forever,increasing by 3% per year because of inflation.

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