An oil company is offered a lease of a group of oil wells on which the primary reserves are close to exhaustion. The major condition of the purchase is that the oil company must agree to undertake a water-flood project at the end of \(5 \mathrm{yr}\) to make possible secondary recovery. No immediate payment by the oil company is required. The relevant cash flows have been estimated as follows:

Should the lease-and-flood arrangement be accepted? How should this proposal be presented to the company board of directors, who understand and make it a policy to evaluate by the investor's rate of return?

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Year Investor's Net Present 0 1-4 5 6-20 Rate of Return Worth at 10% 0 $50,000-$650,000 $100,000 ? $227,000