The oil in well number 66 would be fully drilled after five years of work. The equipment will have no value at the end of this time and will be scrapped. Ahlul uses straight-line depreciation for tax purposes. The tax rate is 30% and Ahlul uses a 12% discount rate in investment proposals. The working capital would be released for other uses at the end of the five years.
Required:
Ahlul Oil Company owns the drilling rights to several oil wells.
The amount of oil in some of the wells is somewhat marginal, and the company is unsure whether it
would be profitable to drill the oil that is contained in these wells. One such oil well is number 66, on
which the following is gathered:

(1) Compute the net present value of Well Number 66.
(2) What should management's decision be?

Question

The oil in well number 66 would be fully drilled after five years of work. The equipment will have no value at the end of this time and will be scrapped. Ahlul uses straight-line depreciation for tax purposes. The tax rate is 30% and Ahlul uses a 12% discount rate in investment proposals. The working capital would be released for other uses at the end of the five years.
Required:
 Ahlul Oil Company owns the drilling rights to several oil wells.
The amount of oil in some of the wells is somewhat marginal, and the company is unsure whether it
would be profitable to drill the oil that is contained in these wells. One such oil well is number 66, on
which the following is gathered:
 
(1) Compute the net present value of Well Number 66.
(2) What should management's decision be?

Quizplus · Accepted Answer

The Answer of The oil in well number 66 would be fully drilled after five years of work. The equipment will have no value at the end of this time and will be scrapped. Ahlul uses straight-line depreciation for tax purposes. The tax rate is 30% and Ahlul uses a 12% discount rate in investment proposals. The working capital would be released for other uses at the end of the five years.
Required:
 Ahlul Oil Company owns the drilling rights to several oil wells.
The amount of oil in some of the wells is somewhat marginal, and the company is unsure whether it
would be profitable to drill the oil that is contained in these wells. One such oil well is number 66, on
which the following is gathered:
 
(1) Compute the net present value of Well Number 66.
(2) What should management's decision be?

The Oil in Well Number 66 Would Be Fully Drilled