Explain sources of uncertainties in your analysis

Assignment Help Financial Management

Reference no: EM131967447

The lands in question can be utilized for oil extraction. If the state permits drilling, they will receive royalties from the drilling equal to 12.5% of total oil sales revenue. The volume of oil and gas that can be extracted from the area of land1 are provided in table 1 below. The projected prices of oil and gas are also listed in table 1.

The grasslands portion of the federal lands in question are currently used for grazing and generates $120 thousand per year in revenue. If the state decides to allow drilling, grazing opportunities will be limited (projected revenue from grazing is 50 thousand per year)

Management of the land is costly. The cost of management is dependent on many variables, but you are given annual cost estimates for each type of management area located within the piece of land. The annual management cost is assumed to stay constant through the next decade (same every year).

Assume r=0.04

Table 1: Projected Oil Extraction and Price (2018 -2029)
Year	Volume (Millions of barrels)	Low Price (Price/Barrel)	High Price (Price/Barrell)
2018	1.85	60	100
2019	1.88	60.6	101
2020	1.91	61.21	102.01
2021	1.93	61.82	103.03
2022	1.96	62.44	104.06
2023	1.99	63.06	105.1
2024	2.02	63.69	106.15
2025	2.05	64.33	107.21
2026	2.08	64.97	108.29
2027	2.12	65.62	109.37

Table 2: Cost Per Year (In hundreds of thousands of dollars, in 2017 dollars)
Management Area	Low Estimate	High Estimate
Rangelands	53.1	118.32
Forests	42	82.46
Refuges and Hatcherries	31	48.5
Wildfire Management	29.5	87.38

e) What is the net present value of state land ownership if benefits and costs are equal to an average of low and high costs/benefits?

f) Explain sources of uncertainties in your analysis

Reference no: EM131967447

Questions Cloud

What is the return on pink panther inc and atomic inc common : The expected return on the market is 12% and the risk free rate is 4%. According to the CAPM, what is the return on pink panther inc and atomic inc common stock

What is the annual yield of the investment : What is the annual yield (internal rate of return) of the investment if the purchase price is $12 million today and the sale price 10 year later is $20 million?

What price should this bond currently sell : At what price should this bond currently sell? Please show all Values e.g pmt, fv, I/y etc

What does expected after-tax operating income equal : a) What does expected after-tax operating income equal if they do not hedge? b) What does expected after-tax operating income equal if they hedge?

Explain sources of uncertainties in your analysis : The lands in question can be utilized for oil extraction. If the state permits drilling, they will receive royalties from the drilling equal to 12.5% of total.

What is the firm cash flow at risk : What is the firm's Cash Flow at Risk (CFaR) if the confidence level is 97.5%, i.e., the cash flow loss relative to the mean, such that there is only a 2.5%

Explain the cross-hedging technique : Explain the cross-hedging technique and why you would use it. How would you interpret an r-square between the two currencies of 0.82?

Identify whether each cost is fixed mixed or variable : Generic Motors incurs three types of costs (a, b and c) in its manufacturing process. Identify whether each cost is fixed, mixed or variable?

What is the implicit borrowing rate being paid by customers : What is the implicit borrowing rate being paid by customers who choose to defer payment for the month?

User Account

All Pages