Mansukh × Your answer is incorrect.An oil and gas exploration firm invested $1,900,000 in drilling for natural gas in a newgas field. The firm's geologist believes the field has the potential to produce gas for 25years. The revenue resulting from the gas well the first year after drilling is $590,000;based on previous experiences with similar types of wells, it is expected the annualrevenue will decrease at an annual rate of 2%. Likewise, the costs of operating the wellthe first year totals $120,000; costs are expected to increase at an annual rate of 4%.Based on a 25-year planning horizon and a MARR of 17%, what is the firm's externalrate of return for the investment?Click here to access the TVM Factor Table calculator.17.23%Carry all interim calculations to 5 decimal places and then round your final answer to2 decimal places. The tolerance is ±0.05.

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An oil and gas exploration firm invested $1,900,000 in drilling for natural gas in a new gas field. The firm's geologist believes the field has the potential to produce gas for 25 years. The revenue resulting from the gas well the first year after drilling is $590,000; based on previous experiences with similar types of wells, it is expected the annual

An oil and gas exploration firm invested $1,900,000 in drilling for natural gas in a new gas field. The firm's geologist believes the field has the potential to produce gas for 25 years. The revenue resulting from the gas well the first year after drilling is $590,000; based on previous experiences with similar types of wells, it is expected the annual

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $135,120 and will increase annual expenses by $69,000 including depreciation. The oil well will cost $445,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 0 decimal places, e.g. 13%.)
Ivanhoe Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $128,225 and will increase annual expenses by $85,000 including depreciation. The oil well will cost $446,000 and will have a $9,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to O decimal places, e.g. 13%) Annual rate of return eTextbook and Media %
1) An oil company is drilling a series of new wells that are adjacent to an existing oil field. About 20% of the new wells will be dry holes and will produce zero oil. If the wells do, in fact, strike oil, they have different expected values. Well One is expected to produce oil worth $5 million per year for 10 years if it strikes oil. The well will cost $10 million apiece to drill. This is depreciable over the life of the project. It requires an investment of $2 million in Net Working Capital, which you will get back in the end. There are $1 million in expenses each year on maintenance and other operating expenses. There is no salvage value. The Beta for a producing well is 0.7. The market risk premium is 7.5%, and the risk-free-rate is 3.6%. For simplicity assume there are no taxes and make further assumptions as necessary. a. What is the correct discount rate for cash flows from the developed wells? b. What is the NPV of the cash flows from the well if you are guaranteed to strike…
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The Engler Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $9 million today. Engler estimates that once drilled, the oil will generate positive cash flows of $3.5 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, it recognizes that if it waits 2 years, it will have more information about the local geology as well as the price of oil. Engler estimates that if it waits 2 years, the project will cost $12 million, and cash flows will continue for 4 years after the initial investment is made. Moreover, if it waits 2 years, there is a 75% chance that the cash flows will be $4.0 million a year for 4 years, and there is a 25% chance that the cash flows will be $2.0 million a year for 4 years. Assume that all cash flows are discounted at 11%. If the company chooses to drill today, what is the project’s expected net present…
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An oil company is considering changing thesize of a small pump that is currently operational inwells in an oil field. If this pump is kept, it will extract50% of the known crude-oil reserve in the first yearof its operation and the remaining 50% in the secondyear. A pump larger than the current pump will cost$1.6 million, but it will extract 100% of the knownreserve in the first year. The total oil revenues overthe two years are the same for both pumps, namely,$20 million. The advantage of the large pump is thatit allows 50% of the revenues to be realized a yearearlier than with the small pump.If the firm’s MARR is known to be 20%, whatdo you recommend based on the IRR criterion?
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