# 2306AFE Quantitative Methods For Business Economics

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## Questions:

1. Your company needs to acquire an optimal mix of oil crude types from a group of supplying nations. We assume that the demand (in Millions of Barrels per year) for oil crude types will be 5 Light Crude; 5 Intermediate Crude; 0.5 Heavy Crude in the first year. Furthermore, as your country is growing rapidly you assume that the demand for all petroleum types will grow at a rate of 1.5%/year. The four countries that can supply your oil demand have the following assumed prices and available supply.

Each ship can carry 1 million barrels of oil. Assume the price for:
Light Crude is \$45/barrel in year 1 and increases at a rate of 1.6% per year for 20 years.
Intermediate Crude is \$35/Barrel in year 1 increases at a rate of 1.7% per year for 20 years.
Heavy Crude is \$20/Barrel in year 1 increases at a rate of 1.8% per year for 20 years.
Your linear programme should decide how many ships you should purchase full of oil from each country in order to minimize your total cost of supply for each year for the 20 year forecast.

2. After assuming the least cost mix of supplies has now been decided upon from question 1, you must now build you Oil Empire by obtaining a refinery. Using your superior knowledge of Net Present Value and Internal Rates of Return, you must now devise a plan to purchase a \$10 Million refinery. Assuming that your refinery can take the above oil supply (Light, Intermediate and Heavy Crudes), you now need to make some Diesel and Gasoline. The refinery uses 3/4 of the oil purchased to make Gasoline and the remaining 1/4 to make Diesel.
To find the potential Total Revenue for each year over the 20 years forecasted demand state the output from your refinery and total revenue
?Using a Base price of \$1.8/L for Gasoline and \$1.85/L Diesel
?Assuming the price of both fuels increase at a rate of 1.9%/year
?Assume there are 157L of oil per barrel
Using the Total Revenue from Gasoline and Diesel Sales, your costs of obtaining the oil and a \$0.1/L refinery cost, establish the NPV of the project assuming a discount rate of 10%. Then calculate the IRR of the project.

3.For the following sub-scenarios write a short analysis on:
?Discuss how/if this project would be profitable at a range of NPV values 6% to 12%
?Discuss how the Capital Cost effects the profitability of the project
?Discuss how if the price of Gasoline only increased at a rate of 1.2% how profitability would change.
?Discuss how if the maximum supply from Saudi Arabia dropped by 30% would affect profitability.
?Discuss if the number of ships from Australia could be increased at a shipping cost of \$2.5 would affect your profitability.

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