oil
...consistent demand and production of 300 million barrels of oil per year 9. The current market value of the company’s stock is currently $39 per share, which takes into account existing production, revenues, and costs 10. No additional expenditures will be required to shut down the exploration and development project Analysis: Refer to Table 1 to see all calculations described below Because the value of a firm equals the value of its current assets plus the NPV of any future projects, to correctly assess the potential value of the Gulf oil stock, we need to calculate the NPV of the planned exploration projects from 1984-1993 and then factor this NPV into the current stock price. To calculate the NPV of the planned exploration projects, the first step is to account for the project cash flows from 1984 to 1993. To accomplish this, we took historical expenses from 1983, grew them at five percent per year, and subtracted these expenses from the revenues per year, which grew at the same rate. To figure out the NPV per barrel, we took the cash flow from 1984 as our initial investment into the project and discounted back the cash flows from 1993 to 1984. We then took into account the growth factor of 5% by dividing the NPV of the planned exploration projects by the cost of capital (17%) minus the growth factor. To allocate this NPV on a per barrel basis, we next divided the total NPV of the planned exploration by the number of barrels added to the reserves from 1984 to 1993 (3 billion barrels). This calculation yields a NPV per barrel of $-3.55. To calculate the NPV per share, we divided the previously calculated total NPV of the planned exploration projects by the total number of outstanding shares (165.3 million) to arrive at the NPV per share of the planned exploration. This calculation yields a NPV per share of -$64.38. Conclusion: From our analysis, the current price of $39/share for Gulf Oil is undervalued because of its existing, planned exploration expenditures. By eliminating these p...