An oil and gas company acquired the mineral rights to a project 2 years ago for a cost of $2 million dollars. Last year the company spent $0.4 million
on geological and geophysical (G&G) expenditures. Today (time zero), the company wants you to analyze whether it is better economically to sell the rights to the property for $4.0 million cash now (at time zero), or whether it would be better to keep the property and develop using one of two drilling development scenarios for which projected before-tax cash flows are given on the following time diagrams. All dollar values are in millions of dollars.
-2.0 -0.4 -12.5 8.0 5.0 4.0 3.0 3.0
A)
-2 -1 0 1 2 3 4 5
-2 -0.4 -9 7 4 2.5 2.5 0
B)
-2 -1 0 1 2 3 4 5
-2 -0.4 -9 7 4 2.5 2.5 0
Use ROR analysis to determine whether it is better to sell the rights to the property today (time zero), or begin development using either the A or B scenarios. Assume the investor is seeking a nominal before-tax minimum ROR of 10%. Verify your ROR findings with NPV and PVR analyses. Then, compare the three options if the minimum ROR is raised to 20% reflecting the hurdle rate the company is currently imposing on projects.
An oil and gas company acquired the mineral rights to a project 2 years ago for a cost of $2 million dollars. Last year the company spent $0.4 million
on geological and geophysical (G&G) expenditures. Today (time zero), the company wants you to analyze whether it is better economically to sell the rights to the property for $4.0 million cash now (at time zero), or whether it would be better to keep the property and develop using one of two drilling development scenarios for which projected before-tax cash flows are given on the following time diagrams. All dollar values are in millions of dollars.
-2.0 -0.4 -12.5 8.0 5.0 4.0 3.0 3.0
A)
-2 -1 0 1 2 3 4 5
-2 -0.4 -9 7 4 2.5 2.5 0
B)
-2 -1 0 1 2 3 4 5
-2 -0.4 -9 7 4 2.5 2.5 0
Use ROR analysis to determine whether it is better to sell the rights to the property today (time zero), or begin development using either the A or B scenarios. Assume the investor is seeking a nominal before-tax minimum ROR of 10%. Verify your ROR findings with NPV and PVR analyses. Then, compare the three options if the minimum ROR is raised to 20% reflecting the hurdle rate the company is currently imposing on projects.
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