Value of an oil company with substantial oil reserves

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You have been asked to analyze the value of an oil company with substantial oil reserves. The estimated reserves amount to 10,000,000 barrels, and the estimated present value of the development cost for each barrel is $12. The current price of oil is $20 per barrel, and the average production cost is estimated to be $6 per barrel. The company has the rights to these reserves for the next twenty years, and the twenty year bond rate is 7%. The company also proposes to extract 4% of its reserves each year to meet cash flow needs. The annualized standard deviation in the price of the oil is 20%.

What is the value of this oil company?

Reference no: EM131540834

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