A Consultancy Calculates That It Can Supply Crude Oil Assaying

question 58

Multiple Choice

A consultancy calculates that it can supply crude oil assaying services to a small oil producer for $115,000 per year for five years. There are some upfront costs the consultancy will require the oil producer to absorb. What is the maximum that these upfront costs could be, if the equivalent annual annuity to the oil company is to be under $160,000, given that the cost of capital is 9%?

• A) $45,000
• B) $175,034
• C) $201,289
• D) $160,000

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Definitions:

Consolidated Income Statement

A financial statement that shows the aggregate operating results of a parent company and its subsidiaries as if the group were a single entity.

FVE Method

FVE Method, or Fair Value Estimation Method, involves estimating the fair value of an asset or liability, taking into account market conditions and other influencing factors.

Equity Method

An accounting technique used when a company invests in another company and has significant influence, typically reflected by owning 20% to 50% of the voting stock, whereby the investment is initially recorded at cost and subsequently adjusted for the investing company's share of the investee's net profits or losses.

Investment in Humble

A financial stake in the company Humble, potentially involving the purchase of shares or other assets to gain a financial return.