A company operating in a large oilfield produces a fixed amount of oil annually

A company operating in a large oilfield produces a fixed amount of oil annually. After the company has finished with an oil-well it commences to operate another well. The number of years each well is operated before being abandoned has been optimised on a minimum-cost criterion. That number of years is called a cycle and comparative costs are all calculated as the net present values for an infinite number of cycles in the future. This optimum cost is £13.5million

Given that the rate of interest on money is 9% per annum:

a) Based on operating costs only, determine the length of the most economical cycle of operation for a well in the new field, costs being based on net present value for an infinite number of cycles.

b) Calculate, on a total cost basis in present terms), whether the company should move from the existing site. How much will the company lose/gain in moving to the new site?

Hint

Accounts & Finance"NPV stands for Net Present Value i.e.value of future money derived today being discounted at a specified discount rate based on certain market forces. Formula for calculating NPV for infinite number of time is NPV = Fv/i where i is the discount rate and FV is the future value.Operating cost is the cost incurred on day to day basis for maintaining the business and operat...

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