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You are considering buying an oil field.  If you buy the field, you can extract the oil...

You are considering buying an oil field.  If you buy the field, you can extract the oil in one year.  There are 100 barrels of oil that can be extracted from the field; the cost of doing so is $4,000.  You expect the price of oil in one year to be $50/barrel.  If your discount rate is 15%, how much are you willing to pay for the field? Assume that you are going to drill in one year no matter what the price of oil turns out to be- that is, ignore real options.

a. $1,000

b. $869.57

c. $0

d. $-295.44

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Answer #1

Amount which , willing to pay for the field = Present value of all the cash flows ( inflows and outflows) discounted using 15%.

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