Executive Summary
Given the facts in the information provided, we do not feel that an offer of more than $64.17 per share is justified. We recommend that management still submit this bid even though it will probably be rejected. Gulf Oil may be forced to accept a bid lower than $70 per share in the event financing falls through for competitors or other unforeseeable circumstances evolve, such as regulation by FTC. The numbers presented below are reliant upon estimates, which makes the findings highly sensitive to changes in the economic environment. For example, if average inflation over the life of the project is 5.8%, then the resulting savings would justify a bid of $70.10 per share. In addition, using 1983 performance would …show more content…

|Year |Consumer |Inflation |
| |Price Index | |
| | |(current yr - prev yr) |
| | |prev yr |
|1976 |$170.50 | |
|1977 |181.5 |6.45% |
|1978 |195.4 |7.66% |
|1979 |217.4 |11.26% |
|1980 |246.8 |13.52% |
|1981 |272.4 |10.37% |
|1982 |289.1 |6.13% |
|1983 |298.4 |3.22% |
| |Average: |8.37% |

Tax Implications and Timeline
We see from Exhibit 2 that $2.189 billion in exploration cost added 359 million barrels of oil to reserves in 1983. Using this year, we determined the total exploration cost per barrel is $6.10. Due to tax codes, only $1.65 per barrel can be expensed ($594 million / 359 million barrels) at the time of payment. The remaining $4.45 per barrel can only be expensed as the oil is extracted. The following table shows the timeline for oil. For simplicity, we assume that all oil found due to the current exploration is extracted