Hat is the max time delay

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Reference no: EM13147546

An Oil company contemplates investing $100 million per year ( in constant dollars) for five years in exploratory work to confirm the existence of the new exploitable reserves. It will then face a potential delay until market conditions justify exploitation, which will require investing $200 million for three years in production facilities, following which delivery of oil can start with a projected net revenue of $100 million per year, essentially ad infinitum. a: At a real discount rate of 5%/yr, what is the longest delay tolerable between the start of exploitation and the start of oil delivery? i.e. How far in advance is it worth proving out reserves? b: If the real discount rate were 10%/yr, what is the max time delay?

Reference no: EM13147546

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