Assume the following information for Alta Gas (CAN). In 2021, Alta estimated the cash inflows from its oil- and gas-producing properties to be $375,000 per year. During 2022, 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 2021, but this amount was revised to $155,000 per year in 2022.

Instructions

(Assume that all cash flows occur at the end of the year.)

a. Calculate the present value of net cash flows for 2021–2023 (3 years), using the 2021 estimates and a 10% discount factor.

b. Calculate the present value of net cash flows for 2022–2024 (3 years), using the 2022 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.