Thisstandsincontrasttothediscountedcashflowvalueof
$12billionthatweobtainbytakingthedifferencebetween
thepresentvalueofthecashflowsofdevelopingthereserve
today($42.38billion)andthecostof development($30.38
billion). The difference can be attributed to the option
possessed by Gulf to choose when to develop its reserves.
Thisrepresentsthevalueoftheundevelopedreservesofoil
ownedbyGulfOil.Inaddition,Gulfhadfreecashflowsto
the firm from its oil and gas production from already
developedreservesof$915millionandweassumethatthese
cashflowsarelikelytobeconstantandcontinuefor 10 years
(theremaininglifetimeofdeveloped reserves).Thepresent
valueofthesedevelopedreserves,discountedattheweighted
average cost of capital of 12.5%, yields:
Addingthevalueofthedevelopedandundevelopedreserves
of Gulf Oil provides the value of the firm.