Assume the following information for Alta Gas (CAN). In 2018, Alta estimated the cash inflows from its oil and gas producing properties to be $375,000 per year. During 2019, a write-down caused the estimate to be decreased to $275,000 per year. Production costs (cash outflows) associated with all these properties were estimated to be $125,000 per year in 2018, but this amount was revised to $155,000 per year in 2019
Instructions
(Assume that all cash flows occur at the end of the year.)
a. Calculate the present value of net cash flows for 2018-2020 (3 years), using the 2018 estimates and a 10% discount factor
b. Calculate the present value of net cash flows for 2019-2021 (3 years), using the 2019 estimates and a 10% discount factor
c. Compare the results using the two estimates. Is information on future cash flows from oil- and gas-producing properties useful, considering that the estimates must be revised each year? Explain