(a) (10%) What is the ending 2018 value of one PP share? Assume that oil prices are expected to fall to $60 per barrel in 2019, $55 per barrel in 2020, and $50 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 5% per year.

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3. Permian Partners (PP) produces from aging oil fields in west Texas. 2018 output was 1.8 million barrels annually, but for the foreseeable future, production is dropping at a rate of $ 7\% $ annually. The total cost of administration, shipping, and production is $ \$25 $ per barrel. In 2018, the average price of a barrel of oil was $ \$65.00 $. Seven million shares of PP are outstanding. There is a $ 9\% $ cost of capital. PP pays out dividends on all of its net profits. Assume, for simplicity's sake, that the firm will always exist and that the price per barrel will always be $ \$25 $. Ignore taxes.

8. (10%) Your firm has gained exclusive manufacturing rights for barkelgassers (BGs) in North America as a result of acquiring a significant patent. An immediate capital expenditure of $25 million will be required to construct production facilities for 200,000 BGs annually. The projected cost of production is $65 per BG. Until the patent expires in five years, the BG marketing manager is certain that all 200,000 units may be sold for $100 each (in real terms). After that, the marketing manager is clueless about the selling price. What is the NPV of the BG project? Assume the real cost of capital is 9%. To keep things simple, also make the following assumptions:-The technology for making BGs will not change. Capital and production costs will stay the same in real terms.- Competitors know the technology and can enter as soon as the patent expires, that is, they can construct new plants in year 5 and start selling BGs in year 6.-If your company invests immediately, full production begins after 12 months, that is, in year 1.There are no taxes.-BG production facilities last 12 years. They have no salvage value at the end of their useful life.

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(a) (10%) What is the ending 2018 value of one PP share? Assume that oil prices are expected to fall to $60 per barrel in 2019, $55 per barrel in 2020, and $50 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 5% per year.

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