Part B: Spreadsheet Analysis Net Present Value Criterion (10 points)

Complete (in Microsoft Excel document) the following problem:

Louisiana Drilling and Exploration, Inc. (LD&E) has the funds necessary to complete one

of two risky oil and gas drilling projects. The first, Permian Basin 1, involves the

recovery of a well that was plugged and abandoned five years ago but that may now be

profitable, given improved recovery techniques. The second, Permian Basin 2, is a new

onshore exploratory well that appears to be especially promising. Based on a detailed

analysis by its technical staff, LD&E projects a ten-year life for each well with annual net

cash flows as follows:

Project	Probability (P)	Annual Cash Flow (CF)
Permian Basin 1	0.08 0.84 0.08	$500,000 1,000,000 1,500,000
Permian Basin 2	0.18 0.64 0.18	300,000 900,000 1,500,000

In the recovery-project valuation, LD&E uses 20% and 32% discount rate for Permian Basin 1 and Permian Basin 2, respectively. Both projects involve land acquisition, as well as surface preparation and subsurface drilling costs of $3 million each.

a). Calculate the expected value of annual cash flows for each project.

b). Calculate the NPV for each project.

c).Which project is preferred using the NPV criterion?

NPV = PV(CF) PV(costs)