# Net present value | Accounting homework help

Suppose that an oil well is expected to produce 100,000 barrels of oil during its first year in production. However, subsequent annual production is expected to decrease by 10% relative to each previous year’s production. It is estimated currently that this oil well has a “proven” reserve of one million barrels, and the cost to produce this oil is \$20 per barrel. We can assume that all of the oil that is produced is sold immediately.

a) If the price of oil is assumed to be \$60 per barrel for the foreseeable future, what is the present worth of the anticipated revenues over the next seven years using an interest rate of 12% compounded annually? (Hint: Revenues = Price times Quantity)

b) If the price of oil is assumed to be \$60 per barrel for the foreseeable future, what is the present worth of the anticipated profits over the next seven years using an interest rate of 12% compounded annually? (Hint: Here, you can adopt the simple definition that Profits = Revenues minus Costs.)

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