The Red Dog oil field will become less productive each year. Martinson Brothers is a small company that owns Red Dog, which is eligible for percentage depletion. Red Dog cost $2M to acquire, and it will be produced over 15 years. Initial production costs are $4 per barrel, and the wellhead value is $9 per barrel. The first year's production is 80,000 barrels, which will decrease by 5000 barrels per year.
(a) Compute the annual depletion (each year may be cost-based or percentage-based).
(b) What is the PW at i = 12% of the depletion schedule?