Question

An oil and gas producing company owns 42,000 acres of land in a southeastern state. It operates 630 wells which produce 18,000 barrels of oil per year and 1.7 million cubic feet of natural gas per year. The revenue from the oil is ​$1,800,000 per year and for natural gas the annual revenue is ​$581,000 per year. What bid should be made to purchase this property if the potential buyer is hoping to make 11​% per year on his investment over a period of 9 years?

Answer 1

Answer:

The bid amount should be $13,200,264.

Explanation:

An oil and gas producing company owns 42,000 acres of land in a southeastern state.

It operates 630 wells which produce 18,000 barrels of oil per year and 1.7 million cubic feet of natural gas per year.

The revenue from the oil is ​$1,800,000 per year and for natural gas the annual revenue is ​$581,000 per year.

Total Annual Revenue

= Revenue from oil + Revenue from gas

= $1,800,000 + $581,000

= $2,381,000

The bid amount should be the present worth of total annual revenue.

Present Worth of total annual revenue

= $Revenue \times\ \frac{( 1 + i )^{n} -1 }{i (1 + i)^{n} }$

= $2,381,000\ \times\ \frac{( 1 + 0.11 )^{9} -1 }{0.11 × (1 + 0.11)^{9} }$

= $2,381,000\ \times\ \frac{( 1.11 )^{9} -1 }{0.11 × (1.11)^{9} }$

= $2,381,000\ \times\ \frac{2.5580 - 1 }{0.11 × 2.5580 }$

= $2,381,000\ \times\ \frac{1.5580 }{0.281}$

= $2,381,000\ \times\ 5.544$

= $13,200,264