Question list K (Payback period and NPV calculations) Plato Energy is an oil and gas exploration...

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Question list K (Payback period and NPV calculations) Plato Energy is an oil and gas exploration and development company located in Farmington, New Mexico. The company drills shallow wells in hopes of finding significant oil and gas deposits. The firm is considering two different drilling opportunities that have very different production potentials. The first is in the Barnett Shale region of central Texas and the other is in the Gulf Coast. The Barnett Shale project requires a much larger initial investment but provides cash flows (if successful) over a much longer period of time than the Gulf Coast opportunity. In addition, the longer life of the Barnett Shale project also results in additional expenditures in year 3 of the project to enhance production throughout the project's 10-year expected life. This expenditure involves pumping either water or CO2 down into the wells in order to increase the flow of oil and gas from the structure. The expected cash flows for the two projects are as follows: Question 9 Question 10 a. What is the payback period for each of the two projects? b. Based on the payback periods, which of the two projects appears to be the best alternative? What are the limitations of the payback period ranking? That is, what does the payback period not consider that is important in determining the value creation potential of these two projects? c. If Plato's management uses a discount rate of 21.8 percent to evaluate the present values of its energy investment projects, what is the NPV of the two proposed investments? d. What is your estimate of the value that will be created for Plato by the acceptance of each of these two investments? Question 11 a. Given the cash flow information in the table, the payback period of the Barnett Shale project is years. (Round to two decimal places.) Question 12 Question 13 Data table - Year Question 14 0 Barnett Shale $(4,500,000) Gulf Coast $(1,100,000) 1 1,800,000 750,000 2 1,800,000 750,000 Question 15 3 (900,000) 425,000 4 1,800,000 120,000 5 1,600,000 Question 16 6 1,600,000 7 1,600,000 8 750,000 9 Help me solve this View an example Get more help 10 650,000 90,000 (Click on the icon in order to copy its contents into a spreadsheet.) Clear all Check answer Question list K (Payback period and NPV calculations) Plato Energy is an oil and gas exploration and development company located in Farmington, New Mexico. The company drills shallow wells in hopes of finding significant oil and gas deposits. The firm is considering two different drilling opportunities that have very different production potentials. The first is in the Barnett Shale region of central Texas and the other is in the Gulf Coast. The Barnett Shale project requires a much larger initial investment but provides cash flows (if successful) over a much longer period of time than the Gulf Coast opportunity. In addition, the longer life of the Barnett Shale project also results in additional expenditures in year 3 of the project to enhance production throughout the project's 10-year expected life. This expenditure involves pumping either water or CO2 down into the wells in order to increase the flow of oil and gas from the structure. The expected cash flows for the two projects are as follows: Question 9 Question 10 a. What is the payback period for each of the two projects? b. Based on the payback periods, which of the two projects appears to be the best alternative? What are the limitations of the payback period ranking? That is, what does the payback period not consider that is important in determining the value creation potential of these two projects? c. If Plato's management uses a discount rate of 21.8 percent to evaluate the present values of its energy investment projects, what is the NPV of the two proposed investments? d. What is your estimate of the value that will be created for Plato by the acceptance of each of these two investments? Question 11 a. Given the cash flow information in the table, the payback period of the Barnett Shale project is years. (Round to two decimal places.) Question 12 Question 13 Data table - Year Question 14 0 Barnett Shale $(4,500,000) Gulf Coast $(1,100,000) 1 1,800,000 750,000 2 1,800,000 750,000 Question 15 3 (900,000) 425,000 4 1,800,000 120,000 5 1,600,000 Question 16 6 1,600,000 7 1,600,000 8 750,000 9 Help me solve this View an example Get more help 10 650,000 90,000 (Click on the icon in order to copy its contents into a spreadsheet.) Clear all Check answer