Wildcat Oil in Kasakstan Essay
May 10, 2011
To: Wildcat Oil in Kasakstan
From: Varun Khurana
About: Cost Estimate of a facility to produce oil
Recommendations 1. Larger facility is a wise investment and therefore recommended
Wildcat Oil has recently discovered a 500 million barrel crude oil reservoir in Kasakstan, and the firm needs a preliminary cost estimate for a feasibility study for a facility to produce the oil and for transporting this oil. Wildcat Oil has already paid the Kasakstan govt. $400M in up-front lease costs for this reservoir. Engineers predict recovery of about 300 million barrels with current technology, however the oil facilities and …show more content…
Total Net Revenue is same as before (i.e. when production is 36,000 bbl/day) = $1.2375B
Net Revenue per year = $1.2375B / 7 years = $177M
1 2 3 4 5 6 7
In the above cash flow diagram, $284M is the cost associated with producing 41000 bbl/day and $177M is the net revenue per year.
Again, $400M is ignored in the analysis since it represents the opportunity cost.
Lets now calculate the Present Worth of $1.2375B for when the production rate is 41000 bbl/day.
P = F(1 + i)-N where i is 15% as mentioned in the case suggestions and N is 7 as we found above, and F is $1.2375B
P = $1.2375B (1.15) -7
P = $1.2375B (0.376)
P = $465M
The Present Worth of this project at a production rate of 41000 bbl/day is $465M and the total profit for Wildcat Oil is expected to be $465M - $284M, which equals $181M.
Since increasing production level to 41000 bbl/day increases Net Revenue by $36.9M (i.e. $181M - $144.1M), the larget facility is indeed a wise investment and highly