letter_-_Sample_Memo_3_1__1_.30_ - Assuming oil is priced...

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To: Edmund Segner From: Mary Student Subject: Sample Memo 3.30 Date: January 9, 2008 Our oil well in field 3.30 is expected to produce 100,000 barrels of oil during the first year. Production is expected to decline 10% per year. We expect to have production rights to this 1,000,000 barrel field for seven years. We do not expect to produce the full field during the seven years at the decline rate of 10%. Assuming oil is priced at a constant $60 during the seven years, the present value today assuming a discount rate of 12% is $21.7 million.
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Unformatted text preview: Assuming oil is priced at $60 in the first year followed by 5% increases thereafter and maintaining the 12% discount rate, the present value is $23.8 million. You also requested that we investigate the present value of our remaining production at the end of year 3 if we sold our rights to years 4 through 7. The resulting present value at the end of year 3 would be $14.3 million which is $10.2 million in today’s present value....
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