Consolidated Natural Gas Company (CNG), with corporate headquarters in Pittsburgh, Pennsylvania, is one of the largest producers, transporters, distributors, and marketers of natural gas in North America. Periodically, the company experiences a decrease in the value of its gas and oil producing properties, and a special charge to income was recorded in order to reduce the carrying value of those assets. Assume the following information: In 2011, CNG estimated the cash inflows from its oil and gas producing properties to be $375,000 per year. During 2012, the write-downs described above 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 2011, but this amount was revised to $155,000 per year in 2012.
Instructions
(Assume that all cash flows occur at the end of the year.)
(a) Calculate the present value of net cash flows for 2011–2013 (three years), using the 2011 estimates and a 10% discount factor.
(b) Calculate the present value of net cash flows for 2012–2014 (three years), using the 2012 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.