The XYZ oil company owns several natural gas wells and is negotiating a 15-year contract to sell the gas from these wells to another company. They are negotiating on the price of the gas in the first year, in dollars per thousand cubic feet ($/MCF). including a 5% escalation clause. XYZ expects the wells to produce 50,000 MCF the first year and to decline at the rate of 15% every year thereafter. Operating costs are estimated to be $2.5/MCF and escalate at 4% per year. XYZ has agreed to spend $1.000,000 now to lay pipelines from each well to the second company's processing plant. What should the minimum price be the first year for this to be acceptable to XYZ? Assume an end-of-year convention and an MARR of 15%. O 7.13 O 889 O 8.13 O 9.50
The XYZ oil company owns several natural gas wells and is negotiating a 15-year contract to sell the gas from these wells to another company. They are negotiating on the price of the gas in the first year, in dollars per thousand cubic feet ($/MCF). including a 5% escalation clause. XYZ expects the wells to produce 50,000 MCF the first year and to decline at the rate of 15% every year thereafter. Operating costs are estimated to be $2.5/MCF and escalate at 4% per year. XYZ has agreed to spend $1.000,000 now to lay pipelines from each well to the second company's processing plant. What should the minimum price be the first year for this to be acceptable to XYZ? Assume an end-of-year convention and an MARR of 15%. O 7.13 O 889 O 8.13 O 9.50
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
Related questions
Question
!
Transcribed Image Text:The XYZ oil company owns several natural gas wells and is negotiating a 15-year
contract to sell the gas from these wells to another company. They are negotiating on
the price of the gas in the first year, in dollars per thousand cubic feet ($/MCF),
including a 5% escalation clause. XYZ expects the wells to produce 50,000 MCF the
first year and to decline at the rate of 15% every year thereafter. Operating costs are
estimated to be $2.5/MCF and escalate at 4% per year. XYZ has agreed to spend
$1.000,000 now to lay pipelines from each well to the second company's processing
plant. What should the minimum price be the first year for this to be acceptable to
XYZ? Assume an end-of-year convention and an MARR of 15%.
O 7.13
O 889
O 8.13
O 9.50
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 4 images
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
