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Your company is interested in purchasing an oil well for 8,000,000. The royalty due the landowner is 20% of production and the improvements for the well include equipment and tanks with a useful life of 7 years and a cost of 1,000,000 and no salvage value. Oil sells for 55 a barrel and production now is 100 barrels a day. It costs 12 a barrel to produce the oil and the decline curve is 40% of this year’s production. It costs 4.00 a barrel to get it to Henry Hub and sell the oil. Your cost of capital is 10%. Should your company buy the well.
Please show all work and formulas used.
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