Question
Fred has found some natural gas on his land and is now looking to sell the right to drill for this gas. Assume that you
Fred has found some natural gas on his land and is now looking to sell the right to drill for this gas. Assume that you are a CFO of a natural gas producer. You have traveled to meet with Fred and he now wants to how much you are willing to pay for this right. As noted below, in addition to the proceeds he will receive from selling this right, Fred will also receive 10% of the revenues from the project. Your company will pay for equipment and all other expenses associated with this project 1.) What is the internal rate of return on this project? 2.) What is the net present value of this project? 3.) How much are you willing to pay for the right to drill on Fred?s land? When making your decision, keep in mind that there is a good chance that Fred is also talking to other companies about this. 4.) Not to be outdone, brother-in-law Chip comes to you with an alternative ?you can?t afford to miss? opportunity. He is asking your company for $1,000,000. This investment is expected to return $1,400,000 at the end of next year (i.e., end of year 1). After some basic analysis you have decided that the appropriate discount rate for evaluating this project is 14 percent. You can not help out Fred and Chip. Who do you help? 5.) Is there any other information that you would like to know before going forward with this?
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