Consolidated Natural Gas Company 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.

Recently, the company experienced 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. The company also wrote down oil and gas properties in the prior two years, and special charges were incurred for severance pay and early retirement incentives as CNG reduced its workforce.

Assume the following information: In 2002, CNG estimated the cash inflows from its oil and gas producing properties to be $350,000 per year. During 2003, 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 2002, but this amount was revised to $175,000 per year in 2003.

Instructions

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

(a) Calculate the present value of net cash flows for 2002–2004 (three years), using the 2002 estimates and a 10% discount factor.

(b) Calculate the present value of net cash flows for 2003–2005 (three years), using the 2003 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.